Is your small business looking for the right type of funding? Short-term business loans have helped many companies find the business financing they need. Whether you are doing a store renovation, need working capital, or want to expand your small business, short-term loans can help. Plus, they are often more flexible than a long-term loan. Continue reading to learn more about short-term loan options and the advantages and disadvantages of short-term loans.
What Is a Short-Term Business Loan?
A short-term business loan, in simple terms, is a lump sum of money given to a company that uses the funding for business purposes. Unlike traditional lending options such as bank business loans, short-term business loans can be approved and funded within days, positioning it as a practical bank financing solution for businesses in need of rapid cash assistance from business finance companies. They are typically less stringent to acquire than their long-term counterparts, often cutting down the need for a pristine credit score or extensive time in business, and introducing a more tolerable eligibility criteria.
Businesses, especially small ones, might resort to borrowing business loans on a short-term basis for a multitude of reasons, such as inventory enhancements, staff augmentation, or satisfying expansion needs. Circumstances that can kindle a sudden need for such loans can range from settling unpaid invoices to a pressing requirement for upgrading business equipment. Implementing short-term finance can ease cash flow tensions, assist in business relocation, or catalyze the amplification and expansion of a marketing strategy.
Depending on the agreement, be it fixed or variable, the business owner might be making repayments monthly, daily, or weekly. Lending decision determinants like fixed costs and interest rates are factored into the repayment plan, striving to streamline the often complex repayment process.
Pros and Cons of Short-Term Business Loans
Before deciding if a short-term loan is right for your business, it's crucial to know all of the pros and cons of this type of funding. Learning about the repayment process, financing terms, and other factors will help you decide. Explore all of the advantages and disadvantages of short-term loans below.
Advantages of short-term loans "The Pros"
There are many benefits to choosing a short-term loan for your small business. As a type of lending products favored by many small business lenders, short-term loans offer fast processing times, simplified application processes, and more lenient qualifications compared to traditional banking loans. This makes it an accessible financing option for businesses of varying sizes. Additionally, such loans often pack discreet perks offered by the lenders, such as lowered lender risk and other incentives, making the option a beneficial financing solution. Be it for start-ups or established entities, there's something for everyone.
Below is a list of possible "Up-sides" of Short-Term Business Loans
- Access to Working Capital - One major benefit of short-term business loans is their ability to offer quick access to working capital. Even if other, more traditional forms of funding have denied you, a short-term loan could be your buzzing lifeline. When you secure the loan, you will have the much-needed cash to realize your business goals.
- Fast Processing Times - For enterprises that need funding promptly, short-term loans cater to speed necessities. Apart from quick processing, these loan options promptly secure approvals and funds, sometimes even on the same day. Opt for short-term loans when you can't afford the luxury of time, ensuring swift capital inflow for business continuity.
- Reduced Documentation - Most short-term business loans simplify the process with limited documentation, which is significantly less than that required for traditional loan options. Such reduced documentation minimizes the risk of loan denial.
- Application Process is Simple - The application process for short-term loans stands out for its simplicity and linearity. Especially if you transact with an online lender, applications can be as easy as a few clicks. If there are any uncertainties, do not hesitate to ask the lender for guidance to ensure your application is precise and complete.
- Easy to Qualify - Short-term loans offer high approval ratings, making it an incredibly useful financing lifeline for those with poor credit history. With such accessible qualifications, these loans ease the process for those facing rejections due to their borrowing history. Typically, the lender will scrutinize the credit scores of the business owner and the company, if applicable. However, for new businesses without credit milestones, loan acceptances will majorly depend on your borrowing history. For individuals with less favorable credit , they might have to apply for a secured loan, meaning potential collateral submissions. If you're unable to repay, lenders might offset the dues against your submitted collateral.
- Great for Small Business Owners - Short-term loans are versatile and inclusive, catering to various companies, counting in small establishments as well. Even if you're new in business, or yet to establish adequate business credit, you can still qualify for this type of financing, given a fair credit score that signals trustworthy payback abilities to your business lenders. Whether you're eyeing traditional banks, online finance entities, or courting the concept of equity funding, short-term loans offer a comfortable transition to larger credit avenues.
Disadvantages of Short Term Loans "The Cons"
Now that you know all the advantages of this type of loan, let's discuss the disadvantages. Each business, including those seeking equipment loans to finance the purchase of business machinery or semi trucks, must carefully consider its specific needs and circumstances. Spreading costs over time and using the equipment as collateral can help, but there's also a significant downside of waiting for a lending decision, as it often takes several weeks to receive the loan proceeds. Besides, businesses might grapple with higher interest rates and collateral costs—a risk when securing the loan.
A noteworthy disadvantage or trespass, is the frequent payment demands these loans entail, often resulting in strict repayment schedules. This might make businesses fearful of short-term loans, hence deterring them from taking on debt. Here's a list of possible 'downsides' of Short-term Business loans.
- High-Interest Rates -Short-term loan's higher rates, in comparison to long-term loans, might be attributable to the more relaxed application process. However, if you repay your loan quickly, the total costs can remain manageable, with some lenders even offering early repayment discounts.
- Additional Fees -Traditional business loans might cost less in terms of fees. Ensure to check with your lender about any additional collateral costs or other expenses you are expected to pay.
- Repayment Time -Short-term loans include short repayment periods. Is your business well-placed to meet these timely interest payments? Consult with your lender or financial advisor if uncertain.
- Limited Flexibility -Traditional lenders can offer more versatility with other loans. Short-term loans, conversely, might have stringent repayment schedules, a point noteworthy for consideration.
- Frequent Payments Are Required -Varying from monthly, weekly, to daily, short-term loans demand frequent payments. Hence, lay emphasis on consistent annual revenue before considering this option.
- Potential for Significant Debt - Every loan, including short-term loans, brings about debt. If repayment isn't full and on time, you risk a cycle of toxic debt repayments, threatening both your company's future and its future financing opportunities. Therefore, proceed with a loan application only when confident of payment adherence.
Who Is The Ideal Candidates for a Small Business Loan?
Though there are many financing options out there, thanks to alternative lenders, your business will still have to choose the one that's right for you. Navigating these options can be challenging, particularly for a startup where things like less-than-perfect creditworthiness or missing financial statements can become substantial obstacles. Therefore, maintaining a positive rating with credit bureaus becomes paramount. This can also reduce the likelihood of encountering exorbitant interest rates.
Yet, getting a business bank loan is by no means guaranteed. As our supplementary research highlighted, the 2022 Small Business Credit Survey by the Federal Reserve Banks found that big banks only partially approved 68 percent of financing applications for small businesses. It is where expert consulting can play a significant role.
Here's a more in-depth look at the criteria important for scoring a short-term business loan, like one from Bank of America, for instance, and how strategic consulting might improve your chances:
- Proven profitability: Lenders want to verify your business's stable income stream and ownership of profit-generating resources. Thus, a demonstration of potential profitability matters.
- Business experience: Ideal candidates should exhibit substantial industry experience, enhancing their creditworthiness for the lender. Consulting professionals can assist startups in projecting this effectively.
- Excellent credit: Having a solid credit score will underscore your credibility as a borrower. Consulting and editorial support can effectively communicate this credibility.
- Clean financial history: Providing annual revenue, along with other pertinent financial data, can affirm that you aren't a high-risk lending investment. An editorial team could help keep the information clear, precise and adhering to editorial standards.
- Strong business plan: Illustrating a robust business plan, detailing how loan funds will be utilized, can contribute to assuring the lenders about the low likelihood of loan default. This essentially means that consulting expertise can further enhance and detail out your business plan for effective communication with potential lenders.
Short Term Financing For Business: Other Types of Short-Term Loans
Besides the standard short-term loan, other financing options are available that have quicker repayment periods than a long-term loan. A small business loan can come in many forms - they aren't always a lump sum. A business credit card might be the best option if you often have to cover emergency expenses. Or, if your company is always running into cash shortages due to unpaid invoices, then invoice factoring is probably the best solution. Discover other types of short-term loans below.
Small Business Administration Loans
The Small Business Administration (SBA) offers several loan programs that businesses can use for needed funding. While some SBA loan options are long-term loans, others offer shorter repayment terms. However, in a recap of the 2022 Small Business Credit Survey by the Federal Reserve, it was revealed that despite the generally attractive terms of business bank loans, they are not always a guaranteed source of funding. Matter of fact, big banks only partially approved 68 percent of financing applications for smaller businesses. Despite this, SBA loans, underscored by a government agency guarantee of up to 85% through SBA-approved lenders, remain a popular choice among qualifying businesses. For complete accuracy, it's important to consult with your own attorney, business advisor, or tax advisor regarding these matters. Our content is authored by highly qualified professionals and is thoroughly fact-checked by subject matter experts to ensure its accuracy and comprehensiveness.
Business Lines of Credit
If your business could use an open revolving line of credit, then a business line of credit is the best financing option. This type of funding, often offered by both traditional banks and online lenders, has proven to be one of the best financing products available.
- It allows business owners to draw funds and make purchases up to a set limit.
- A principal and interest rate are charged.
- It offers a renewal for extension feature, making it a continuous credit facility.
The major takeaway here is that, business lines of credit provide flexibility and responsiveness to business opportunities or unexpected repairs - a distinct benefit when likened to other types of short-term loans. But it's imperative to remember the unique financing needs involved. Often viewed as a more accessible financing product, a business line of credit might be simpler for businesses to qualify for when traditional high-street bank financing proves too stringent, with online lenders often being more amenable.
Business Cash Advance
A business cash advance, or purchase of future sales agreements, advances money off future sales. The business owner is then responsible for paying back a fixed payback amount greater than the sum deposited into their account. The difference between the two amounts is known as a "factor rate". It’s a set rate working differently than your typical principal and interest rates, much like how machinery can enhance efficiency and productivity.
Merchant Cash Advances
A merchant cash advance (MCA) is a great financing option if your business utilizes credit card sales frequently. MCA advances are connected to future credit card sales rather than overall sales. The MCA will take a set percentage of all future credit card sales until the advance is paid back in full. Since they're automatic, you don't have to worry about making payments on time with this type of funding.
Invoice Financing
For those businesses or business owners with a less-than-stellar credit report, invoice financing offers a funding option with less financial scrutiny. Given its place as one of the more lenient financing alternatives, you can get the capital your company needs by selling your unpaid invoices to the lender. In comparison to traditional loans, even those offered through website application processes, this may be a more streamlined approach. That said, it's important to remember that factors such as a lender's availability of products in your area could impact your approval.
Your business gets to choose just how many outstanding invoices you'd like to sell. Essentially, the lender will assess the financial records of the business that needs to pay the invoice. It's an optimal choice for tackling cash flow shortages, a hurdle that companies with accounts receivable can strategically maneuver through, sometimes even via website applications.
Purchase Order Financing
Another type of short-term financing is purchase order (PO) financing. Similar to equipment financing, PO financing is a practical solution for businesses as it allows the capital to be used to pay suppliers upfront for purchase orders. This financing type comes with reduced business risks and offers flexible terms, permitting the advance to fund part or all of an order. Just like equipment financing options, these short-term financing tools require minimal paperwork and documentation, enhancing their appeal to many businesses.
Business Credit Cards
A final type of short-term funding available is a business credit card, which functions the same as a personal credit card. On behalf of your company, you can make purchases as needed, offering maximum flexibility. Just like they would for a standard credit card, your business will need to make payments monthly.
Choosing The Best Short-Term Loans
When considering funding options, there are many factors to consider. Thankfully, short-term loan options, requiring minimal paperwork compared to traditional loans, prove to be more flexible and less tedious. They offer ease of qualification, making them a top choice among businesses of all sizes. If a long-term loan and extended period for repayment aren’t for you, then choosing a short-term option, which necessitates less documentation, will serve your company well.
Exploring the advantages and disadvantages of short-term financing—including the quick access to funds due to reduced paperwork—will aid your company in making an educated decision.
