Many businesses will experience a need to quickly obtain funds at some point, whether it’s due to an emergency, a new business opportunity, or a seasonal slow period. Short-term business loans can allow companies to quickly access funds that they pay off during a short timeframe, providing working capital to get through temporary financial binds.
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What is a short-term business loan?
A short-term business loan is a financing option that can provide funds to businesses that want to borrow funds quickly, then repay them within a short time span. Terms for short-term business loans are typically between six months and 18 months, although they can be as short as three months or as long as three years in some cases. Because of the shorter repayment period, loan amounts are usually smaller than longer-term loans.
Because short-term business loans provide funds quickly (often within days) and generally have less stringent requirements than longer-term loans, they can be ideal for businesses who find themselves with an urgent need for funding. Small businesses often operate with relatively small margins, which means that a sudden emergency, seasonal slow period, or unusually large project may strain their available resources. Short-term loans can step in to help them cope with these demands.
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How does a short-term business loan work?
Short-term business loans can come in a few different types of financing vehicles, but most are set up as traditional term loans: the borrower receives a one-time lump sum payment, which is then paid back with interest. Short-term financing can also be structured as a line of credit, invoice financing, or a merchant cash advance.
Borrowers should be aware that with short-term business loans, repayment schedules are often daily or weekly, rather than monthly, which is more common with traditional long-term loans. Because the timeframe of the loan is shortened, lenders will often require more frequent repayment schedules.
Interest rates are also important to take note of, as many short-term loans use a factor rate, rather than an interest rate. Factor rates are calculated just once, prior to the loan being issued, and represent a percentage or multiple of the total loan amount that will be charged as a fee.
Oftentimes, factor rates are expressed as multiples (e.g., 1.15x), but keep in mind, a factor rate is not the same as an interest rate and may sometimes mask the true annual percentage rate (APR) of a loan. When comparing lenders, make sure you understand the true APR of each loan in order to make an apples-to-apples comparison.
| Factor rate loan | Interest rate loan | |
|---|---|---|
| Term | 1 year | 1 year |
| Loan Amount | $10,000 | $10,000 |
| Rate | 1.2x | 20% |
| Financing Cost | $2,000 | $1,116.14 |
| Total Loan Cost | $12,000 | $11,116.14 |
| APR | 35% | 20% |
What types of short-term loans are available?
Short-term loans are commonly structured as standard installment loans, but other types of funding are also considered short-term loans. Here are some common types of short-term loans:
- Business term loan. A business term loan provides a lump sum of cash in a single payment, which the borrower then pays off in regular installments, with added interest.
- Business line of credit. A business line of credit is a revolving loan. Businesses are given a credit limit and can borrow as much or as little as they need, up to that limit. As the business pays back the borrowed funds, those funds become available to borrow again.
- Invoice financing. Invoice financing is a type of revolving loan that allows businesses to borrow money against their unpaid invoices, with the invoices serving as collateral. Invoice financing may be structured like a loan, with the borrower paying back the lender once invoices are paid.
- Invoice factoring. Invoice factoring is another type of invoice financing in which the business sells invoices to the lender, and the lender is then responsible for collecting payment.
- Merchant cash advance. A merchant cash advance gives businesses a lump sum of cash, which is then paid back with a percentage of the borrower’s daily earnings.
How can businesses use a short-term loan?
Short-term business loans are flexible and can be used for many business purposes. For example, they can provide working capital to cover payroll and other expenses during a slow period or allow businesses to buy extra inventory and hire seasonal employees to prepare for busy periods like the holidays or summer.
Some common reasons businesses use short-term loans include:
- Purchasing inventory or equipment
- Paying suppliers
- Fulfilling orders
- Paying tax bills
- Payroll or hiring and training employees
- Emergency repairs
- Renovations or maintenance
- Advertising and marketing costs
- Covering cash flow gaps while waiting for customers to pay invoices
- Dealing with unexpectedly large orders
- Starting new major projects
What are the advantages of a short-term business loan?
There are several advantages to short-term business loans.
- Provides payment quickly. Short-term loans are usually able to provide cash within a few days.
- Easier to qualify for. Short-term loans are generally easier to qualify for than a longer-term loan or an unsecured business line of credit. Businesses with lower credit scores or less time in business can still receive a loan.
- Simpler to apply for. Applying for a short-term business loan requires less extensive documentation than long-term or SBA loans. Online lenders usually have a streamlined online application.
- Flexible. Short-term business loans can be used for most business purposes with few restrictions.
- Smaller loan amounts are available. Lenders may not offer small loan amounts with longer terms. If your business only needs a small amount of money, a short-term loan can provide this.
- Paid off quickly. Many small businesses may not want to commit to a long period of loan payments.
What are the disadvantages of a short-term business loan?
There are several disadvantages to short-term business loans.
- Higher interest rates and fees. Compared to longer-term loans, short-term business loans have higher interest rates and fees. There may be multiple fees or different ways of calculating interest, which can be confusing and expensive.
- Frequent repayment schedule. While longer-term loans generally require repayment on a monthly basis, short-term loans may repay on a daily or weekly basis. For businesses that have an unpredictable cash flow, this can be problematic.
- Payments can be large. Because short-term loans have to be paid off quickly, larger loan amounts can mean unmanageably large payment amounts.
- Potential debt problems. Because short-term loans are fairly easy to obtain, if businesses borrow too much without being able to pay it off in the time given, there’s a risk that they will become mired in a cycle of borrowing more money without fully paying off their previous loans.
- Some lenders require collateral.
How do I qualify for a short-term business loan?
To apply for a short-term business loan, you will need to provide documentation including payment history for your other loans or accounts, bank statements, financial statements, revenue and sales numbers, tax returns, and credit scores.
The exact requirements to receive a loan depend on the lender. Some lenders will require you to have been in business for a certain amount of time, such as one or two years, but others will lend to startups. Startups will likely need to provide forecasts for their cash flow and sales.
In some cases, lenders will require collateral—assets that could be repossessed if the borrower is unable to repay the loan—but businesses that have been operating for longer than one year and have strong credit scores may not be required to provide collateral. However, a personal guarantee is typically still required.
Generally, there are higher qualification requirements for unsecured loans, while newer businesses with limited history or lower credit scores are likely to qualify only for loans secured with collateral. Businesses with higher credit scores are able to qualify for more favorable terms.
Where can I get a short-term business loan?
The market for short-term loans is relatively large, so your business will have a lot of options when it comes to lenders. Here are some places you can look to in order to secure short-term financing for your business.
Online Lenders
Short-term business loans are commonly available from online lenders, some of which focus specifically on short-term lending. Online lenders are typically able to offer an easy application process that will allow you to access funding quickly.
Banks and Credit Unions
Banks and credit unions offer short-term loans and business lines of credit as well. It’s common for businesses to arrange a line of credit through a bank, but banks typically focus their term loan offerings on longer term loans, although it may be possible to receive a short-term loan from some banks.
Payment Platforms
Payment processors and merchant platforms may also provide short-term loans. Companies like Square, PayPal, Adyen, and Square all offer some form of short-term financing, usually charging a flat fee for the loan. Approvals are generally quick, and repayments are typically made by deducting a percentage of your daily card sales through the platform.
Compare Lenders
There are a variety of loan options and lenders in the market, and it may be difficult sorting through all of the options. AdvisorSmith analyzed over 30 different lenders and determined the top lenders for small businesses. To determine the best lenders, AdvisorSmith considered a number of factors, including financial strength ratings, customer satisfaction data, complaint ratings from the Better Business Bureau, available terms and loan amounts, and availability of information and ease of use of the lender websites.
| Lender | Best For | Description |
|---|---|---|
| National Business Capital | Overall | National Business Capital is a financing marketplace that specializes in connecting small businesses with a variety of loan products and over 75 lenders. |
| Rapid Finance | Short-term Loans | Rapid Finance is an alternative lender known for offering a variety of short-term loans targeted at small and midsize businesses. |
| Lendio | Startups | Lendio is a financing marketplace that works with a variety of lenders, many of whom offer loans specifically for startups. |
| Fundbox | Lower Credit Scores | Fundbox is an alternative lender that is best known for offering lines of credit and invoice financing for small businesses. |
| Accion Opportunity Fund | Microloans | The Accion Opportunity Fund is a non-profit lender focused on providing funding to small businesses, particularly business owners who are underrepresented minorities and women who may not qualify with other traditional lenders. |
Final Word
When you operate a small business, you may find yourself facing temporary cash flow problems, whether it’s due to an unexpected equipment failure that needs to be repaired, a seasonal fluctuation in sales, or a major new project that requires funds to get off the ground. A short-term loan can help businesses deal with these circumstances, providing an infusion of capital that can be paid back quickly. There are a variety of types of short-term loans available; businesses should carefully consider their options to pick the best loan for their situation.
