Nearly every business requires additional capital at some point in its operation. An ideal option for many business owners is taking out a short-term business loan, which can be used for various purposes, including filling cash flow gaps, purchasing inventory, or expanding operations.
Here’s a quick overview of how short-term business loans work, the interest rates charged, and how to qualify for one.
What Is A Short-Term Business Loan?
A short-term business loan is a form of financing that gives business owners access to a certain amount of money to finance unexpected business expenses. This type of loan is designed to be paid off faster than regular business loans, typically three to 36 months, depending on the lender.
Since this is a temporary financing solution, a short-term small business loan is ideal for businesses that need quick funding to finance their operations.
Common types of short-term business financing include:
- Business term loans: A business term loan is a kind of financing that gives the borrower access to a lump sum amount of cash typically repaid within a predetermined period. Interest starts to accrue immediately after the loan is funded.
- Business lines of credit: A business line of credit works much like a credit card. Business owners can access a set amount of money when needed. Interest accrues only for the amount used within the draw period.
- Invoice factoring: This is a type of short-term financing where businesses sell outstanding invoices to a factoring company where they exchange them for a lump sum of cash. The factoring company then collects the invoices from customers and gets paid an agreed percentage.
How Do Short-Term Business Loans Work?
Short-term business loans work like traditional business loans but differ in repayment periods and loan terms. Generally, short-term loans have shorter repayment periods, usually three months to 36 months, with daily or weekly repayments.
Since this type of funding has lenient credit score requirements, it’s easy to get approved for and is always funded within one to three business days. However, their flexible eligibility requirements typically have higher interest rates than traditional installment loans.
What Can You Use a Short-Term Business Loan For?
As mentioned earlier, small business owners can use short-term business loans to:
- Fill gaps in cash flow: If your business has seasonal income or other regular cash flow challenges, a short-term business loan may come in handy to provide the needed cash to have your business up and running again.
- Cover unexpected business expenses: No matter how much you plan, unplanned business emergencies that require quick access to cash are bound to happen at one point. Maybe you need additional working capital to purchase the necessary inventory or pay your employees. This is when you turn to a short-term loan.
- Short-term business opportunities: A short-term small business loan may be an excellent option if your business finds a business opportunity with a revenue increase potential.
- Business expansion: Perhaps you plan to expand your business operations by opening new branches in different locations but don’t have enough funds. A loan can help you achieve that in no time.
Short-Term Loan Common Rates And Terms
Before taking a short-term loan, it’s always crucial to consider the interest rates offered by lenders. Typically, short-term business loans have higher annual percentage rates (APR) than long-term business loans. Depending on the lender, the rates can range anywhere between 8% and 99%.
In some cases, lenders may charge a factor rate instead of an interest rate. A factor rate expresses interest rates in a decimal figure rather than a percentage. The factor rate helps borrowers evaluate how much will be owed on the loan.
Pros And Cons Of Short-Term Business Loan
A short-term business loan has many benefits:
- Getting a short-term loan funded takes less time, typically one to three business days.
- Most lenders have lenient requirements to get approved for a loan, with some even accepting low credit scores.
- Simple loan application process since limited paperwork is required.
- Ideal for a variety of business purposes.
Like any other financial product, short-term business loans have downsides:
- Unlike long-term loans, short-term loans tend to have higher interest rates mainly because of their flexible requirements.
- Repayment is often daily or weekly, contrary to monthly
- Falling behind your loan repayments or defaulting could negatively affect your credit score.
How To Qualify For A Short-Term Business Loan
Many factors go into getting approved for a short-term loan, depending on the type of business financing and the lender. Here are some tips that will improve your odds of getting approved for a short-term business loan.
- Determine the need for a loan: Why do you want to borrow a business loan? Is it for expanding your business operations, covering emergency expenses, or increasing revenue potential? Based on these considerations, take out a loan that perfectly fits your business needs.
- Check your credit score: Like any other loan, the credit score is one of the major determining factors for approval. While short-term loans have lenient credit score requirements, this varies from one lender to another. Ideally, a FICO score of at least 600 will qualify you for a short-term business loan.
- Compare rates for different lenders: Different online lenders have varying rates and terms. Evaluating various lenders is wise to ensure that you are getting the best rates. In addition to that, read reviews from previous customers to pinpoint any red flags.
- Submit an application: Once you’ve found a lender that fits your needs, it’s time to send in your loan application. Many lenders offer online applications where you submit your personal information and wait for approval. Your lender will disburse the funds within a set period if you meet the requirements.
FAQs About Short-Term Business Loans
A short-term business loan typically takes three months to three years but often less than a year. The repayment period for short-term financing varies based on the loan term and the lender. Before you borrow a short-term loan, you should be ready to start repaying immediately.
Since startups are always looking for cash to cover their business’s immediate expenses, it’s challenging to qualify for short-term loans. To increase the chances of approval, a business startup may want to write an extensive business plan stating how the business makes money.
Qualifying for a short-term business loan with bad credit may be difficult, though some lenders have lenient credit score requirements. Ideally, a FICO score of at least 600 or boosting your application with documentation that proves your business’ financial stability will increase your approval odds.
