Weighing the Pros and Cons of a Short-Term Business Loan

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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 their pros and cons.

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 then uses the funding for business purposes. Short-term business loans are typically easier to acquire than their long-term counterparts, which often require a higher credit score or more time in business. For this reason, short-term business loans provide easy funding opportunities for startups and other new companies.

There are a multitude of reasons why a small business might need a short-term loan. Here are a few examples of what short-term financing can be used for:

  • Expand your business
  • Increase your inventory
  • Recruit and hire new talented employees
  • Make up for unpaid invoices
  • Update or upgrade your business equipment
  • Improve your business’s cash flow
  • Relocate your business to a new location
  • Enhance and expand your marketing strategy

Short-term means the term loan has a fixed length or period in which the borrower has to repay the loan. Depending on the agreement, the business owner might make monthly payments or, in other cases, daily or weekly payments. Short-term loans have fixed costs built into the monthly repayment plan, or they’re based on an interest rate with principal and interest.

If your small business needs cash fast, many online lenders offer funding in 24 hours or less after approval. Borrowing money doesn’t have to be complicated or stressful. Your company can find the financing it needs thanks to online lenders offering short-term business loans.

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 make your decision. Explore all of the advantages and disadvantages of short-term loans below.

Short-Term Loan Advantages

There are many benefits to choosing a short-term loan for your small business. With fast processing times, an easy application process, and minimal qualifications, short-term loans offer a promising financing option for companies of all sizes.

Access to Working Capital 

One of the advantages of short-term business loans is the access to working capital it offers. If you’ve been declined for other more traditional forms of funding, then a short-term loan could be a great option. When you secure the loan, you will have the cash you need to meet your business goals.

Fast Processing Times

Companies that need funding fast are in luck. Short-term loan options offer quick processing times, with applications being processed and approved, then funded, as fast as the same day. If you need fast capital for your business, then you should consider a short-term loan. It’s perfect for those who can’t afford to wait for the duration of a longer approval process.

Reduced Documentation

Many short-term business loans require little documentation to apply, especially compared to traditional loan options. Requiring less documentation lessens the risk of being declined a loan.

Application Process is Simple

The application process for short-term loans is often simple and straightforward. Most applications can be completed online, especially if you choose to work with an online lender. If you have questions, don’t hesitate to ask the lender to ensure your application is completed properly.

Easy to Qualify

Most short-term business loans are easy to qualify for, with remarkably high approval ratings. Because they’re easy to qualify for, short-term loans are a great business financing option for anyone with poor credit history. If you are being denied funding because of your borrowing history, look into short-term loan options.

Lenders will typically review the business owner’s credit score and the company’s credit score, when applicable. If your business is new and has yet to build a credit score, then your loan acceptance will weigh heavily on your personal borrowing history. Those with poor credit might have to apply for a secured loan, in which the lender will ask you to submit collateral. If you’re unable to make the repayment, they will collect your collateral in exchange.

Great for Small Business Owners

The nice thing about short-term loans is that they are available to a wide range of companies, including small businesses. Those that need business loans but haven’t been in business long or built up enough business credit can still qualify for this type of financing, as long as your personal credit score is high enough for the business lenders to trust your payback abilities.

Short-Term Loan Disadvantages

Now that you’re aware of all the advantages of this type of loan, let’s discuss the disadvantages. Each business will have to weigh its needs and circumstances to decide if this type of funding is suitable for its company. Some might not be able to handle high interest rates or be scared to take on debt. Continue reading to learn the cons of short-term loans.

High Interest Rates 

The interest rate for short-term loans is typically higher than long-term loans because the application process is a lot more relaxed than alternatives. Loans with longer terms usually end up costing less when it’s all said and done. However, if you repay your loan as quickly as possible, this won’t be an issue. Some lenders even offer an early repayment discount.

Additional Fees

Depending on your loan agreement, there may be fees that cost more than traditional business loans. This isn’t always the case, but it’s best to check with your lender about any additional expenses you can expect to pay.

Repayment Time

Short-term loans often have very short repayment periods. This is probably obvious when you consider their name, but it’s important to remember. Can your business make interest payments on time? If you’re not sure, you should talk it through with the lender or your financial advisor.

Not Very Flexible

Traditional lenders sometimes offer more flexibility with their other loans. Short-term loan terms may not be very flexible regarding their repayment schedule, which is something to keep in mind.

Frequent Payments Are Required

Most short-term loans require very frequent payments. Making payments monthly, weekly, or even daily is typical. If your business does not have a consistent annual revenue source, you might want to consider other loan options with more flexible repayment terms.

Potential for Significant Debt

Like most forms of financing, you will acquire debt when you take out a short-term loan. Acquiring any business debt will always be a little risky, so you should only apply for a loan if you’ll be able to pay it on time and in full. Otherwise, you will be caught in a destructive cycle of debt repayments. This can ultimately jeopardize your company’s future and its ability to find financing in the future.

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. Sometimes bad credit or missing financial statements can get in the way of securing financing or lead to high interest rates. To know what you’ll need to secure a short-term loan, check out the list below.

  • Proven profitability: Lenders want to know that your business is making money.
  • Business experience: Ideal candidates have some business experience.
  • Excellent credit: Having good credit will make you a more attractive borrower.
  • Clean financial history: Providing annual revenue reports and other financial documents will show you aren’t a lending risk.
  • Strong business plan: Sharing your detailed business plan can help secure a loan.

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 of money. If you often have to cover emergency expenses, then a business credit card might be the best option. 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 take advantage of for needed funding. While some of the SBA loan options are long-term loans, others offer shorter repayment terms. The government agency guarantees up to 85% of the amount provided through SBA-approved lenders, making SBA loans a popular choice among businesses that qualify for it. It’s also a safer bet than an unsecured loan.

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 allows business owners to draw funds and make purchases up to a set limit. There is a principal and interest rate charged, and it requires renewal to be extended. Business lines of credit are a flexible financing option when you consider other types of short-term loans.

Business Cash Advance

A business cash advance, or purchase of future sales agreements, advances money off of future sales. The business owner is then responsible for paying back a fixed payback amount greater than the amount advanced to the company. The difference between the two amounts is called a “factor rate,” and it is a set rate that doesn’t function like typical principal and interest rates.

Merchant Cash Advances

A merchant cash advance (MCA) is a great financing option if your business utilizes credit card sales frequently. These advances are connected to future credit card sales instead of overall sales. The MCA will take a set percentage of all future credit card sales until the advance is paid back in full. You don’t have to worry about making payments on time with this type of funding since they’re automatic.

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. By selling your unpaid invoices to the lender, you can get the capital your company needs. Traditional loans do not offer this kind of flexibility.

Your business can choose how many outstanding invoices you’d like to sell, and the lender will look into the financial records of the business that needs to pay the invoice. It’s an excellent choice for solving cash flow shortages that any company with accounts receivable can utilize.

Purchase Order Financing

Another type of short-term financing is purchase order (PO) financing. When PO financing is utilized, there are few business risks because the capital is used to pay suppliers upfront for purchase orders. The terms are flexible, meaning the advance can finance part or all of an order.

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. Your company is able to make purchases as needed, offering maximum flexibility. Your business will need to make payments monthly, just like they would for a standard credit card.

Choosing Short-Term Loans

When considering funding options, there are many factors to consider. Thankfully, short-term loan options are often more flexible than long-term loans and easier to qualify for, 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 will serve your company well. Exploring the advantages and disadvantages of short-term financing will help your company make an educated decision.

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