A Guide to Short-Term Business Loans for Small Businesses

Disclaimer: Information in the Business Financing Blog is provided for general information only, does not constitute financial advice, and does not necessarily describe Biz2Credit commercial financing products. In fact, information in the Business Financing Blog often covers financial products that Biz2Credit does not currently offer.

Even when they have financing needs, many small business owners prefer not to take on debt. After all, you’re trying to make money, not owe it. Still, sometimes you need a financing solution. Rather than get a large small business loan from a bank, some small business owners instead use short-term business loans to get a quick influx of cash.

Short-term business loans can be a great asset for small businesses that need a little capital to get started or grow but don’t want significant long-term debt. These loans may have repayment terms as short as 18 months and very short turnaround times.

Takeaways:

• Short-term small business loans are a way to quickly get money for your business and may be repaid in as little as 18 months.
• Short-term business loans help small businesses stay afloat and agile, from navigating unexpected expenses to dealing with a seasonal downturn.
• Most short-term business loans are offered by online lenders, which work faster than traditional banks but may have higher interest rates.

In this article:

• What is a Short-Term Business Loan?
• How Does a Short-Term Business Loan Work?
• Pros & Cons of Short-Term Business Loans
• Why a Small Business May Need a Short-Term Business Loan
• How to Get a Short-Term Business Loan
• Conclusion
• FAQ

What is a Short-Term Business Loan?

Short-term business loans are like any other term loan, except that they have a much shorter repayment period. While Biz2Credit offers short-term loans with repayment periods of up to three years, usually the repayment period ranges from less than a year to about 18 months. Traditional term loans, on the other hand, usually have repayment periods of 7-25 years, which will rack up a tremendous amount of interest over time.

Short-term business loans typically have much faster processing times than traditional business loans, which may take up to a month for approval. Short-term loans may be approved in a few business days, or as little as 24 hours with Biz2Credit.

While the loan terms are different, the main reason a small business owner may opt for a short-term loan over a long-term one is that they need money fast. They may have had an accident at a factory that caused a production backlog, need funds to keep the business afloat through a seasonal downturn, or must respond to a big increase in demand. Long-term needs tend to be more focused on overall business expansion or a significant acquisition.

Common types of short-term loans include:

• Term loan: A lump sum payment, paid back over a set period of time with interest.
• Business credit card: Just like your personal credit card, a business credit card lets you spend money now and pay it back as you go.
• Business line of credit: Somewhere between a small business loan and a credit card, a business line of credit gives a business a predetermined credit line of readily available cash that can be drawn on at any time. Interest is only charged on the amount drawn.
• Merchant cash advance (MCA): A lump sum cash payment to a business that will be paid back based on a factor rate of future sales.
• Invoice factoring: A short-term funding method in which a small business sells its outstanding invoices to a third-party in exchange for immediate cash.
• Invoice financing: A type of financing in which a small business owner borrows against the value of outstanding invoices to get cash now.

How Does a Short-Term Business Loan Work?

Short-term business loans function like most other types of business loans, albeit with a streamlined application process. A small business owner applies for a specified amount of money, the lender reviews the application, approves (or denies) it, underwrites the loan, and once all parties have agreed to the repayment terms, the lenders distributes the funds.

Online lenders, like Biz2Credit, can process online applications and distribute funds much faster than traditional lenders like banks. Some qualified borrowers may receive a funding decision the same day they apply.

Depending on the lender and your particular situation, you may get a secured or unsecured loan. A secured loan is one in which you provide business collateral or a personal guarantee upfront to ensure the loan will be paid back. If you fail to repay the loan, the lender can repossess that collateral or place a lien on your business until you repay the debt (plus penalties). An unsecured loan has no such collateral and, since it’s a greater risk for the lender, typically has higher interest rates.

Because they’re meant to be paid back so quickly, short-term loans tend to have higher interest rates. That’s the trade-off. You’ll make payments for a shorter period of time than you would with a long-term business loan, but the interest on those payments may be higher.

Pros & Cons of Short-Term Business Loans

Pros

• Fast funding: The application process tends to be easier and approval times are much faster with short-term loans than long-term ones since loan amounts are smaller and lenders recoup the money more quickly.
• Many loan options available: There are several types of short-term loans and many online lenders available, giving small business owners plenty of options.
• Won’t keep your business in debt for long: With quick repayment periods, short-term loans should help your business without saddling it with debt for decades to come.

Cons

• Frequent payments: Some short-term loans require daily or weekly payments rather than monthly payments. That can become a challenge if your business has delays on payments, such as those with Net 30 payment terms from clients.
• Typically higher interest rates than conventional loans: Although some online lenders actually offer lower interest rates than long-term loans, it’s more common to find higher interest rates.
• Lower limits than conventional loans: If your business needs a substantial cash infusion of several hundred thousand dollars, a short-term loan is probably not your best bet. These loans must be repaid fast, so not only do they have lower limits, but you’ll need to be cautious about only using what you need.

Why a Small Business May Need a Short-Term Business Loan

There are many reasons why a business owner may seek a short-term business loan. Since they offer fast funding, they’re particularly useful for businesses that need a little money to get through a bump in the road. Some of the most common reasons include:

• Small expansions: Major growth initiatives may require a larger, longer-term loan, but if you need some liquidity for a down payment on a new office lease or to pay a new staff member or two, a short-term loan can help provide the working capital to support small expansions.
• Buying equipment: Equipment leases tend to be more affordable in the short-term, but using a short-term loan to buy equipment outright will likely save you money in the long-term.
• Marketing campaigns and business opportunities: Short-term loans are useful for capitalizing on business opportunities, like effectively marketing a new product and increasing production to meet the demand generated from a successful marketing campaign.
• Emergency expenses: Should a piece of equipment break down, an important employee leaves unexpectedly, or the economy takes a downturn, a short-term loan can help your small business tread water until you can turn a profit again.
• Seasonal slowdowns: Seasonal businesses like restaurants or gift shops in vacation towns make most of their money in a certain time of year. Short-term loans can help them stay operational throughout the rest of the year so they don’t have to shut down completely until the busy season.

How to Get a Short-Term Business Loan

Getting a short-term business loan is usually easier than applying for a long-term conventional loan or a U.S. Small Business Administration (SBA) loan. The process is straightforward.

1. Evaluate the need for a short-term business loan

First off, figure out why you actually need a loan. It may be to cover emergency expenses, take advantage of a business opportunity, or something else entirely. Knowing why you need the money can help you figure out what type of loan you need.

For instance, you can’t pay employees’ salaries with a business credit card, but you can do so by drawing from a business line of credit. Likewise, if pay day is coming up and your business bank account is looking a little tight, you could use invoice factoring or invoice financing to get the cash you need now based on the value of your company’s outstanding invoices.

By evaluating the need and how you’ll use the money, you can also determine a reasonable repayment strategy. If you want something you can actively use and pay back as you go, a business credit card or line of credit may be the answer. But if you want a larger lump sum now to buy an essential piece of equipment and are willing to pay it back over the next 18 months or so, a term loan may better suit your needs.

2. Determine amount

One of the primary benefits of a short-term business loan is that you can pay it back quickly. So, don’t borrow so much that making payments will be a burden.

Again, if you need some working capital to draw on or act as a safety net regularly, a business line of credit or business credit card with a $10,000 limit may get the job done. If you have a specific plan for the money, take some time with an accountant to figure out exactly how you will budget a loan amount to achieve your goals.

Never borrow more than you can afford to pay back in a timely manner and make sure you understand how the interest rate will impact how much you actually end up paying back to the lender.

3. Research lenders

As we’ve touched on before, different lenders may offer very different interest rates. They may have different repayment terms or restrictions on how you use the money. On the one hand, there are many online lenders out there today, including Biz2Credit. On the other, so much choice can be overwhelming.

Take the time to research lenders and their loan offers, read reviews, and check out their published interest rates. You can always get in contact with a loan servicer to ask more specific questions, too.

4. Apply

When you understand your needs and have found the right lender for you, it’s time to apply. Most lenders allow you to apply online in just a few minutes. Different lenders and types of loans may have more or less stringent eligibility requirements, but usually what you need to qualify is:

• Credit score requirement: A minimum credit score of 525 for an MCA, 580 for a business line of credit, and 660 for a term loan. If you have a Small Business Scoring Service (SBSS) business credit score, a number above 155 is considered good. Even if you have bad credit or some spots on your credit history, you can likely still get an MCA or utilize invoice factoring.
• Annual revenue: For term loans, most lenders want to see at least $250,000 in annual revenue, while a business line of credit may require as little as $10,000 monthly revenue.
• Cash flow: Financial statements that show your business has positive cash flow and isn’t already saddled by debts will help expedite approval. Cash flow gaps may present a red flag to some lenders.
  Identification and company info: Finally, it’s pretty obvious, but you’ll likely need a state-issued ID and company information like the official name, entity type, and tax ID.

Conclusion

Small businesses have access to many types of business funding. However, not all businesses want to take on a lot of debt for many years. Businesses with specific short-term goals or more immediate cash flow needs may benefit from short-term financing. These loans offer fast access to cash and have shorter repayment terms than conventional loans, making them great loan options for debt-averse entrepreneurs who nonetheless need business financing. As business needs change and evolve over time, it’s a good idea for small business owners to proactively evaluate their situations to see if they can benefit from a short-term business loan.

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