When is a Short-Term Business Loan the Right Choice?

Even with all the business loan options, term loans are among the most popular financing methods.

These types of loans come with different terms, which are the amount of time business owners have to pay them back. Short-term loans are a option for quick cash flow crunches, while long-term business loans are a financing solution for real estate acquisitions or equipment upgrades.

This article will explain the differences between short- and long-term loans so you can figure out whether a short-term loan is the right option for you.

The Basics of Short-Term Loans

Term loans provide you with a lump sum of cash that you pay back over a period of time, known as the term. A short-term loan has a shorter term, meaning a faster repayment period than a long-term loan. The payback periods for short-term loans can vary, but it’s typically less than one year.

This type of financing lets you get access to cash relatively quickly. Even though short-term loans tend to come with higher interest rates than longer-term loans, the monthly payments and overall interest paid is relatively small because the money is paid back quickly. The loan amount will vary depending on the lender you work with, and if they have more stringent requirements like a minimum credit score or revenue requirements.

Short-term funding can help cover cash flow issues and pay for unexpected business emergencies such as a need to replenish inventory, hire temporary workers to cover a busy period, provide working capital, or pay bills. They can also allow your business to take advantage of opportunities, such as launching a seasonal marketing campaign or taking advantage of a discount on supplies or equipment.

Borrowers can apply for small business loans from traditional lenders like banks and credit unions, as well as alternative lenders online. Loans partially guaranteed by the U.S. Small Business Administration (SBA) are available through SBA-approved lenders. However, fast funding can be difficult to come by with SBA loans and eligibility requirements are tighter.

SBA loans and bank loans come with relatively low interest rates, but small business owners must have good personal credit scores to qualify for them. Additionally, their companies must be in operation for a few years and have solid cash flow and annual revenue. Startups and relatively new businesses typically don’t qualify.

Financing from online lenders usually comes with higher interest rates, but loan eligibility is easier and the online application process is typically faster. Once approved, you could receive the funds into your business bank account in one business day.

Very small term loans, known as microloans, are available through community-based organizations and the SBA. This financing is usually reserved for women and other minorities and businesses in disadvantaged communities.

Another popular type of short-term financing is a business line of credit. It works like a credit line you’d take out on your home. The lender provides you with access to funds, and you borrow against them as needed. You only pay back the money when you use it, and the interest rates on lines of credit are relatively favorable.

When to use them

Short-term loans are best used for business needs that suddenly come up.

Short-term loans are relatively easy to qualify for and quicker to finalize than long-term business financing. This makes them ideal if you’re squeezed for cash because of an unexpected emergency and need funds quickly. They’re also suitable for taking advantage of limited-time business opportunities.

Typically, short-term loans require you to provide less documentation than long-term ones. The application and approval process can be faster and less stressful in many situations. Short-term small business loans have higher interest rates and typically come in lower amounts than long-term loans, making them less of a risk for the lender.

Also, a poor business credit score doesn’t automatically eliminate business owners from getting approved for short-term financing, especially if they apply through online and alternative loan companies. Short-term loans through these providers are a good option for those who have been in business for a short period or have a less than perfect credit history.

If you apply through an online or alternative lender, double-check the interest rates, repayment terms, origination fees, prepayment penalties, and the reputation of the loan company. Make sure you’re getting a fair deal from a reputable provider. Also, be aware that if you’re using business funding for a financial emergency and miss a payment, it could cause significant harm to your credit score.

Here are some common scenarios where short-term financing is a sensible funding option.

Limited time operational costs

If you need seasonal (holiday or summer) support to purchase inventory to cover a rush period or buy a piece of equipment for a unique project, a short-term loan is a sensible financing option.

Unexpected expenses

When emergency expenses arise, a short-term loan could help you manage through it. Weather emergencies, an equipment malfunction, unexpected tax bills, or inventory damage can occur at any time. While insurance may cover some of these expenses, it’s necessary to have cash to deal with these situations and get back on track.

Cash flow gaps

Almost every company has irregular periods of cash flow. For instance, several clients are late paying their bills, or a project takes longer than expected to complete. When you don’t have the cash you need but can count on the money to come in soon, short-term financing could help you overcome the hurdle while continuing to run your business smoothly.

The Bottom Line on Short-Term Business Loans

There are a variety of types of short-term business loans to fix a cash crunch in any business. They can be better than taking money out of payroll or using a high-interest business credit card with a strict credit limit. They often times have a low credit score requirement, which can help service businesses with bad credit history.

As you’re searching for a short-term loan, be sure to shop around at different lenders, including traditional banks as well as online lenders.

If your business needs are long-term, you may look into long-term lending options like merchant cash advance. In the end, having a solid plan for paying back a short-term loan is critical. Your plan could include:

• Ensure your cash flow during the repayment period is adequate to cover the loan payments.
• Setting aside monthly revenue to meet the monthly loan payments.
• Coming up with a disaster plan before taking out short-term financing.

FAQS About Short-Term Business Loans

1. What are the typical repayment terms for a short-term business loan?

   There is typically no upfront payment. You will make payments you agree upon with the lender. In some cases, they can be weekly payments or monthly payments.

2. What do you need to qualify for a short-term loan?

   The requirements for a short-term business loan vary from lender to lender. Generally, you will need documentation like business bank account statements, cash flow statements, and your credit history.

3. What is the quickest way to get a business loan?

   The quickest way to get a business loan is likely to use an online lender. They typically work faster than a traditional bank.

4. What is the best loan option for a small business?

   There are several different options for small business loans. They can vary on business purpose, length of time, how frequent payments are, and credit score needed to be approved.