A common question is: "What is a short-term business loan?" The simple answer is that "Short-Term" generally means business loan financing paid back within 6 to 12 months. In some cases, that term can be extended to as much as 18 to 24 months, but that's the general rule of thumb of 6 to 12 months. There is more than one type of financing in this business lending category, so you want to know what options best suit your needs.
Let's explore the 4 types of short-term business funding options we have identified that can help you get the business funding for your business.
4 Types of Short-Term Business Loans
Short-term business loans can be a valuable tool for small business owners who need to access financing quickly. These loans are typically designed to be repaid within a year or less. They can be used for various business needs, including inventory purchases, equipment upgrades, and working capital. Several short-term business loans are available, each with unique features and requirements. Understanding the different options can help you choose the best financing solution for your business.
1. Short-Term Business Loan
A short-term business loan is a business loan in which a fixed sum of money is provided to the business with a fixed term of repayment within a typically 6 to 12-month period with exceptions up to 18 to 24 months. The payments are fixed and are typically an auto deduction from a business bank account, either monthly, bi-monthly, weekly, or in some cases, daily if the business has a very low average daily balance in the business bank account.
The rate can be either principal & interest, simple interest, or a factor rate. These rates vary greatly depending on the industry, time in business, personal and business credit of the business owner, financial statements, and health of business bank account cash flows. Principal & Interest rates are typically between 7.99% to 29%, and Factor rates are typically 1.18% to 1.45%, which is dependent on the creditworthiness of the business owner and the business.
- Loan Size: $10,000 up to $500,000 (with exceptions into the millions)
- Term: 6 to 12 months (with exceptions to 18 to 24 months)
- Payment Frequency: Auto Deduction ACH Monthly, Bi-Monthly, Weekly, or in some cases daily M-F
- Rates: Principal & Interest rates are typically between 7.99% to 29%, and Factor rates are typically 1.18% to 1.45%
What are the Qualifications for a Short-Term Business Loan?
Qualifications can vary from Alternative Business Lender, but general standards are a business that has been typically operating for over six months and can show sales deposits over $10,000 per month through a business bank account. As a guide, from a credit perspective, lenders accept credit scores as low as 500 FICO, but above 600 is preferred.
- Minimum 6 months in business
- Sales Deposits of at least $10,000 per month, $150,000 annually
- Credit scores above 500
What is Required to Apply for a Short-Term Business Loan?
- 1 Page Application
- 3 months' Business Bank Statements
Sometimes the following will be requested on a larger amount (above $100,000) short term business
- Tax Return (if applicable)*
- Profit & Loss (if applicable)*
- Balance Sheet (if applicable)*
- Accounts Receivable/Payable (if applicable)*
*Requirements vary depending on the bank, business lender, or business funder
Benefits of Short-Term Business Loans
- Substandard, Mid-Prime, to Subprime credit scores
- Low monthly or annual revenue
- Challenged or no financial statements available such as Tax Returns, Balance Sheets, or Profit & Loss
- Business bank statement issues such as low daily balances and/or overdrafts or NSFs
- Less than 3 years in business
- The need for speed, for when you need money faster than the traditional process allows.
Why Should I Choose a Short-Term Business Loan?
Short-term business loans provide capital to businesses that otherwise might not be available as the standards to acquire are much lower than that of Banks. Banks are much stricter with credit, business financials, cash flow, profit, or collateral, and the process can take weeks. Short-Term Business Loans are easier, and the process can be as little as a day.
2. Business Lines of Credit
A Business line of Credit is business financing revolving credit with a credit limit that operates similarly to a credit card. There is no term in a business line of credit as it is revolving and open-ended. Minimum payments are monthly and typically lower than fixed-term business loan products. This product is flexible in that you can draw money on the business line of credit at any time instantly as long as you don't exceed your credit limit. Business credit lines are usually up for review periodically and annually and require credit checks and financial statement requests for review and renewal approval.
The rate is principal & interest. These rates vary greatly depending on the industry, time in business, personal and business credit of the business owner, financial statements, and health of business bank account cash flows. Principal & Interest rates are typically between 7.99% to 29%.
- Loan Size: $5,000 up to $250,000 (with exceptions into the millions)
- Term: Revolving open-ended credit facility
- Payment Frequency: Auto Deduction ACH Monthly, Bi-Monthly, or Weekly
- Rates: Principal & Interest rates are typically between 7.99% to 29%
What are the Qualifications for a Business Line of Credit?
Qualifications can vary from Banks and Alternative Business Lenders. Still, general standards are a business that has been typically operating for greater than a year and can show sales deposits over $15,000 per month through a business bank account. As a guide, from a credit perspective, lenders accept credit score minimums above 600 is preferred. Some business lenders even require as much as 660 or greater.
- Minimum 1 year in business
- Sales Deposits of at least $15,000 per month, $175,000 annually
- Credit scores above 600 preferred
What is Required to Apply for a Business Line of Credit?
- 1 Page Application
- 3 months' Business Bank Statements
Sometimes the following will be requested on the larger amount (above $100,000)
- Tax Return (if applicable)*
- Profit & Loss (if applicable)*
- Balance Sheet (if Applicable)*
- Accounts Receivable/Payable (if applicable)*
*Requirements vary depending on the bank, business lender, or business funder
Benefits of Business Line of Credit
- Flexible ability to draw funds instantly on demand
- No set term, revolving open-ended credit
- Principal & Interest Rates instead of factor rates
- Low payments
- More than a year in business but less than 3 years in business available
- The need for speed, for when you need money faster than the traditional process allows.
Why Should I Choose a Business Line of Credit?
Business lines of credit provide capital to the business in real-time to pay bills, clear emergency cash flow problems, and other time-sensitive needs that a business may have. Term loans don't have the flexibility in payment or speed necessary that business lines of credit have. Also, the cost of funds tends to be less than that of short-term business loans.
3. Business Cash Advance
A business cash advance, also known as a purchase of future receivables agreement, is not a business loan but an advance on future sales repaid at a discount to the business funder.
Business owners receive a lump sum of money upfront and have to pay a greater amount back, called a specified amount, by paying a set fixed percentage of their future sales by a daily or weekly ACH payment out of the business bank account until the greater payback amount (also known as specified amount) is paid in full.
There is no fixed term or time to pay back, so it is more flexible than a term loan because the agreement sets a fixed percentage of monthly sales that must go towards repayment. Repayment can fluctuate with the sales flow, so a business can pay less monthly if sales drop. Unlike a business term loan, this is not considered a business loan as the business owner is not responsible for repaying any remaining balance if the business ceases to receive sales.
The cost is a factor rate or fixed cost that may or may not have an early pay discount if paid off early. It is not an interest rate or principal & interest rate. These factor rates vary greatly depending on the industry, time in business, personal and business credit of the business owner, financial statements, and health of business bank account cash flows. Factor rates are typically 1.18% to 1.45%, which is dependent on the creditworthiness of the business owner and the business.
- Loan Size: $10,000 up to $500,000 (with exceptions into the millions)
- Term: No set term
- Payment Frequency: Auto Deduction ACH Weekly or Daily Monday-Friday
- Rates: Factor rates are typically 1.18% to 1.45%
What are the Qualifications for a Business Cash Advance?
Qualifications can vary from Alternative Business Lender, but the general standards are a business that has been typically operating for over 6 months and can show sales deposits over $10,000 per month through a business bank account. As a guide, from a credit perspective, lenders accept credit scores as low as 500 FICO, but above 600 is preferred.
- Minimum 6 months in business
- Sales Deposits of at least $10,000 per month, $150,000 annually
- Credit scores above 500
What is Required to Apply for a Business Cash Advance?
- 1 Page Application
- 3 months' Business Bank Statements
Sometimes the following will be requested on larger amounts (above $100,000)
- Tax Return (if applicable)*
- Profit & Loss (if applicable)*
- Balance Sheet (if Applicable)*
- Accounts Receivable/Payable (if applicable)*
*Requirements vary depending on the business funder
Benefits of Business Cash Advance
- Substandard, Mid-Prime, to Subprime credit scores
- No fixed term
- Challenged or no financial statements available such as Tax Returns, Balance Sheets, or Profit & Loss
- Business bank statement issues such as low daily balances and/or overdrafts or NSFs
- 6 months in business or greater
- The need for speed, for when you need money faster than the traditional process allows.
Why Should I Choose a Business Cash Advance?
Business Cash Advance provides capital to businesses that otherwise might not be available to them as the standards to acquire are much lower than that of short-term business loans or business lines of credit, let alone any bank business fundings. Business cash advances are easier to acquire, and the process from application to funding can be as little as a day.
4. Merchant Cash Advance
A Merchant Cash Advance, also known as a Future Sales Purchase Receivable Agreement, is a business funding in which a fixed sum of money is provided to the business with repayment of a set payback amount, known as a specified amount. Repayment is made by taking a set percentage of future credit card sales until the payback amount (a specified amount) is paid back in full.
Unlike a business term loan, a merchant cash advance is not considered a business loan. The business owner is not responsible for repaying any remaining balance if the business ceases to receive sales. This product is for Business that accepts a lot of credit card sales on a daily basis.
The cost is a factor rate or fixed cost that ranges from 1.18% to 1.45% of the funded amount. These factor rates vary greatly depending on the industry, time in business, personal and business credit of the business owner, financial statements, and health of business bank account cash flows. This is not an interest rate. Factor rates depend on the creditworthiness of the business owner and the business.
- Loan Size: $10,000 up to $500,000
- Term: No set term
- Payment Frequency: Set percentage of future credit card sales taken upon every credit card batch
- Rates: Factor rates are typically 1.18% to 1.45%
What are the Qualifications for a Merchant Cash Advance?
Qualifications can vary from Alternative Business Funder, but general standards are a business that has been typically operating for over 6 months and can show credit card sales deposits in excess of $10,000 per month with daily credit card sales. As a guide, from a credit perspective, funders accept credit scores as low as 500 FICO.
- Minimum 6 months in business
- Credit Card Sales Deposits of at least $10,000 per month with frequent transactions on a daily basis
- Credit scores above 500
What is Required to Apply for a Merchant Cash Advance?
- 1 Page Application
- 3 months' Business Bank Statements
- 3 months Merchant Processing Statements (more may be needed for seasonal businesses)
Sometimes the following will be requested on a larger amount (above $100,000)
- Tax Return (if applicable)*
*Requirements vary depending on the business funder
Benefits of Merchant Cash Advance
- Flexible repayment of a percentage of future credit card sales
- Substandard, Mid-Prime, to Subprime credit scores
- No term limit or prepay penalty
- Challenged or no financial statements available such as Tax Returns, Balance Sheets, or Profit & Loss
- Business bank statement issues such as low daily balances and/or overdrafts or NSFs
- Less than 3 years in business
- The need for speed, for when you need money faster than the traditional process allows.
Why Should I Choose a Merchant Cash Advance?
Merchant cash advances provide capital to businesses that otherwise might not be available. The repayment is made by a set percentage of credit cards instead of a fixed payment auto-deducted from a business bank statement.
The standards to acquire a Merchant Cash Advance are much lower than that of Banks or lenders who take a fixed payment from the business bank account. Banks are much stricter with credit, business financials, cash flow, profit, or collateral, and the process can take weeks. A merchant cash advance is easier, and the process can be as little as a day.
4. Business Credit Cards
Business Credit Cards are very similar to that personal credit cards in that it is a revolving line of credit with a card issued for purchases and payments with merchants that accept credit cards as payment. Business Credit Cards have a credit limit but can be used 24/7, providing instant access to money to operate a business.
The rates are principal & interest. These rates vary greatly from one bank to another, so do your homework. We recommend looking at the following resources to compare shops. Credit Cards.com, Credit Karma, or nerd wallet are excellent resources.
- Credit limits: $1,000 up to $75,000,000 (with exceptions that can be higher)
- Term: Revolving open-ended credit
- Payment Frequency: Monthly minimum payments
- Rates: Principal & Interest rates are typically between 0% to 29.99%
What are the Qualifications for Business Credit Cards?
Qualifications can vary from bank to bank, but general standards are that the business owner has good credit. Typically higher than 660 credit score, but maybe much higher with minimums of 720 or even higher.
- Some established incoming revenue from the business
- Credit scores above 660
What is Required to Apply for a Business Credit Card?
- 1 Page Online or over the phone Application
- 3 months Business Bank Statements (if applicable)
*Requirements vary depending on the bank
Benefits of Business Credit Cards
- Low monthly minimum payments
- No term limit opened ended revolving credit
- Very little paperwork is required for approval
- 24/7 access to money
- The need for speed, for when you need money faster than the traditional process allows.
Why Should I Choose a Business Credit Card?
Business Credit Cards are a must for every business. Business Credit Cards are great for making payments and acquiring items on the fly for the business. We view Business Credit Cards as supplemental to other business loan products you may need as you grow your business and should be part of your arsenal. Banks are much stricter with credit, so this may or may not be an option for you as a business owner. Bad Credit customers may want to look at other options. Business Credit cards do have their limits, as they tend to offer much less money than other business loan products.
The Bottom Line: Short-Term Business Loans
Searching for the best option is important when choosing to finance your business. With the knowledge of what's available, business owners can make better decisions on how to get money for their business.
Sometimes there's no choice in business loan products when choosing a business loan. The approval difference between banks and alternative business financing for small business owners frequently boils down to simple necessity and approval.
The bottom line is that when you can't get approved for other, more traditional products, this may not be the best alternative but the only alternative if you need money for your business. Business owners must consider the benefits of acquiring the money with the costs and terms associated with business funding. As a business owner, ask yourself how this money I am financing helps the business. What does the business have to gain from it? Is it worth the cost? If the answer is yes, and it's the best option available, then you know the answer.
Like any other business funding, make sure you comparison shop and always get 3 quotes. It's not always about the price and terms but also the level of service you will get from the business lender or funder, so make sure you think of the big picture and not solely focus on rate and terms.
