Successful entrepreneurs know that business owners need to focus on the big picture to win over the long haul. But it’s important not to lose sight of the short-term needs of your small business, as there won’t be a long-term if you get tripped up by day-to-day obstacles. When you hit some unexpected expenses in your growth plan, don’t let them become a distraction. A short-term loan for business can help you solve your problems and get back to your business plan in no time.

What is a Short Term Loan for Business?

A short-term business loan has a short repayment period, typically 18 months or less. With this type of financing, you can often qualify for fast funding, sometimes letting you access funds within a week of submitting your loan application if you use an alternative lender.

Signs You May Need a Short Term Loan for Business

Here are some common signs that you may need short term business funding:

Your Working Capital Ratio is Too Low

Your working capital (current assets minus current liabilities) is a way to determine your ability to meet financial obligations over the next year. Your current assets include cash and cash equivalents, accounts receivable, prepaid expenses, and inventory. Accounts payable, accrued expenses, notes payable, and taxes payable are a few current liabilities. The ideal working capital ratio (current assets / current liabilities) is widely considered to be between 1.5 and 2. If your working capital ratio is below this range, you may need additional funds to avoid financial trouble.

You Want to Invest in Marketing

Even the best product or service won’t generate revenue if nobody knows it exists. The good news is you don’t need a massive budget to advertise your small business. You can hire an agency to build a website and create a lot of SEO content with this strategy, you could continue generating leads months or years after your initial investment.

You could also invest in traditional forms of advertising, such as television and print. You may see quicker results, but the upfront investment is often on the higher end. Short-term funding can help with this, letting you get the results you need whether you’re a new business, opening a new location, or having cash flow gaps.

You Need a New Piece of Equipment

As a small business owner, a day may come when something unexpectedly breaks down, and you need a new piece of equipment immediately. You may be able to replace a $1,200 laptop without taking out a short term loan for business, but would likely have a tough time buying a $250,000 piece of machinery with cash, especially if you needed it in just a few business days!

In an urgent situation, you should ask a business lender how long it takes to get approval and funding for a loan. You could be stuck waiting for weeks or months with a traditional bank or credit union, whereas alternative lenders may offer you fast funding in a week or just a few days.

There is an Economic Slowdown

Economic downturns happen, whether caused by a housing crisis, a stock market bubble, or a once in a lifetime pandemic. These things are hard to plan for, but thankfully, they typically don’t last very long, so a short-term loan of 12-18 months should allow you to weather most economic storms.

Types of Short Term Financing for Businesses

There are several types of financing solutions that can meet your short term needs.

Term Loan

A term loan provides the borrower with upfront cash to be paid back on a set schedule at a variable or fixed interest rate. You can get a term loan from a traditional lender or online lender. You can use a term loan for various short-term business needs, including equipment, inventory, seasonal staff, and long-term needs, such as real estate.

Term loan payment plans can be as short as 12 months (but term loans aren't exclusively a short-term financing option). You may have to wait months to get funded if you get a term loan through a traditional bank or credit union. Many alternative or online lenders offer fast funding, so you may be able to get a term loan in less than a week if you go this route.

Business Credit Card

A business credit card allows you to finance your business’s short-term needs and simultaneously build your business’s credit history. Business credit cards typically come with a high interest rate, so if you won’t be able to pay off your balance each month, this can be an expensive financing option.

With a business credit card, you may get perks such as cash back, sign-up bonuses, travel rewards, and more. But these perks often come with an annual fee, so make sure the ROI is there before signing up for a card with a fee.

Business Line of Credit

A business line of credit has much in common with a business credit card. This type of financing allows small business owners to access money up to a predetermined limit for general business expenses. There is no lump-sum disbursement; you only borrow what you need when the money is needed and only pay interest on the amounts borrowed. A business line of credit usually has a variable interest rate.

This small business financing option is ideal for unpredictable, short-term needs, as the line of credit is available whenever necessary, and you can use the funds however necessary.

Usually, you don’t have to meet high eligibility requirements to qualify for a business line of credit from an online funder. It will depend on the lender, but common requirements include $10,000 in average monthly revenue, a 580+ credit score, and 12 months in business.

Merchant Cash Advance

A merchant cash advance (MCA) provides a lump sum to a small business owner to be paid back based on future sales. The amount to be repaid is calculated by multiplying the lump sum by a factor rate (typically somewhere between 1.2 and 1.5). The payments can be based on a percentage of your estimated future sales or actual sales. So, if you expect to have revenue of $50,000 per month at the time you receive the MCA, but your numbers end up being much higher or lower, your selected option could significantly impact how long it takes to repay the MCA.

Invoice Factoring

With invoice factoring, you can sell your outstanding invoices at a discount to a factoring company and get immediate cash. You receive the value of the invoices minus a 1-5% factoring fee; the factoring fee depends on the customer’s creditworthiness and whether the company has recourse in the event of nonpayment. All things being equal, a recourse factor has a lower fee than a nonrecourse factor.

The fees on this small business financing option may seem inconsequential, but invoices are usually paid in a short period of time. A fee of 2%, applied over a couple of weeks works out to a high APR. But an easy approval process makes invoice factoring worth considering once in a while.

Invoice Financing

Invoice financing is another way to turn your invoices into cash. But unlike invoice factoring, where you sell your invoices to a factoring company and they collect payments from your customers, with invoice financing, you are responsible for collecting the payment from your customer and paying back the amount you borrowed plus fees.

You can get fast cash for your small business by using invoice financing. However, the fees can be high on an annualized basis, as we’ve seen with invoice factoring.

You might choose invoice financing over invoice factoring if you wanted to handle customer invoices yourself, and invoice factoring if you’d rather have the factoring company do it.

Pros and Cons of Short-Term Financing

Let’s examine some pros and cons of using short-term loans for business.

Pros

Here are a few pros:

• Easier application and approval: with a longer-term loan, the lender must be confident in the borrower’s long-term future. In addition, the loan amounts tend to be higher. So, the lender must do their due diligence and only accept the most creditworthy small business owners. With a short-term loan for business, the lender recoups the funds quickly, and loan amounts tend to be lower, so an easy loan application process and an easy approval process are common.
• Fast funding: If you need a quick small business loan, this is a good option. The easier application and approval processes allow the borrower to get fast funding in many cases.

Cons

Here are a few cons:

• Frequent payments: With some short-term financing options, you may have to make daily or weekly payments instead of monthly payments. These repayment terms could be an issue if you have a very short-term (7-10 days) cash flow problem.
• Easy to overuse: If you start relying on expensive types of short term financing, like invoice factoring or invoice financing, it may start to eat away at your profit margin. It could also be a sign that your business has some larger problems that can’t be fixed with short-term financing. So, it may be better to take a step back and fix the problems in your business instead of using repeat loans to cover cash shortfalls.
• Potential for high interest rate: Some types of short-term financing have high interest rates, making the cost of borrowing money more expensive. So, make sure you understand the terms before applying.

The Bottom Line

Short term financing can be a helpful solution when you have business needs that your cash on hand can’t solve. With options ranging from short term loans for business to invoice factoring and business lines of credit, even startups and new businesses may be able to find something that works for their needs.

FAQs About Short Term Loans for Business

What’s the difference between a short-term business loan and a regular business loan?

Short term business lending tends to offer loans with higher interest rates and a faster repayment schedule than traditional business loans.

What are the advantages of using short term loans for business?

The best short term business loans often have a faster approval process, so you get your money faster. And the requirements may be less stringent than a traditional loan.

What types of short term financing are available for small businesses?

Short term financing solutions include short term loans, business lines of credit, business credit cards, invoice factoring, invoice financing, and merchant cash advances.

How do I determine if I need a short term business loan?

You may need a short term business loan if you have a working capital ratio below 1.5, need to quickly purchase new equipment, or need additional cash flow during a slow revenue season.

Are short term business loans more expensive than long term business loans?

Short term business loans may have higher interest rates than long term loans, but its more important to look at ROI than it is to look at the cost of the loan. If you need a loan to keep your business afloat or to take advantage of a business opportunity, then it may be worth it even if the interest rate is a little higher than a long term loan.

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