Short term loans are a popular business loan or financing option for startups because, as the name implies, they offer small business owners one of the quickest routes to working capital. Short term business loans are designed for the fast dispersal of a lump sum of money upfront, so your startup doesn’t experience any cash flow gaps as you grow.
Unfortunately, the catch with short term business loans is that loan amounts must be repaid in an equally fast fashion, meaning these financing options aren’t the right fit for every startup business. There are a few details to know about short term business loans before settling on this specific product.
When Should Startups Consider Short Term Business Loans?
Business loans are a valuable asset for any startup organization, often helping to improve cash flow to the business. Unlike other loan products, short term funding calls for much less credibility capital, meaning you don’t need as much time in business or any collateral to receive the loan amount you’re looking for from a lender.
Although these loan products aren’t always right for everyone, short term business loans are still some of the best kinds of business funding for startups and can offer many benefits. Here are a few common situations where short term funding may come in handy for startup businesses:
- You need access to capital fast.
- You have a poor personal credit score or business credit score.
- You cannot afford the interest rates of other loan products.
- You do not have any collateral to offer.
- You don’t want limitations on how you can use loan funds.
Of course, it’s a good idea to avoid any loan with terms your business can’t meet. High interest rates and strict repayment terms can quickly put your enterprise in the hole. Look for a loan or financing tool with attractive rates and repayment terms you can actually adhere to over time, even if it is just a short amount of time.
Short Term Business Loans: 6 Details Your Startup Should Know Before Applying
There are a few critical details to consider before choosing a short term small business loan for your startup. Between the various kinds of loans available and eligibility or credit score requirements from traditional lenders, there’s a lot to be aware of when it comes to short term financing options.
Below, we dive further into these fine details to help you determine whether short term business loans are the best fit for your startup:
1. Obtaining Short Term Business Loans Is Easy
With so many lenders offering to fund small businesses these days, the process of obtaining a loan is only getting easier. Online lending sources are perfect for people with sub-optimal credit scores or minimal time in business, who often lack the credibility capital to secure another type of loan.
Other funding products often require at least one year in business, if not more, making them much more difficult to qualify for as a startup. However, with short term small business loans, you can have less than one year in business and still qualify for short term funding.
Applying for short term loans is a simple process, too, even if you have bad credit. Typically, alternative lenders only require a fast application and a few months of bank statements to prove your startup business’s creditworthiness when seeking a short term business loan.
2. Repayment Periods Are Short
One of the primary reasons startup enterprises select short term funding products is the shorter repayment terms that come with these types of financing tools. Typically, short term business loans are paid back over six to eighteen months, but repayment terms can vary depending on the lenders you work with and the loan products you choose.
Like all term loans, short term business loans must be repaid within a fixed amount of time. Loans from banks and online lenders can be repaid quickly with automatic weekly, bi-weekly, or monthly payments drawn from a business bank account.
3. You Can Say Goodbye to Credit Requirements
Commonly, lenders like banks and credit unions offer many kinds of business funding that require a minimum credit score for approval. However, short term business loans typically have much less stringent credit requirements or may not call for a minimum credit score at all.
Since minimum credit score requirements aren’t standard with shorter-term business loans, they’re a better option for startup business owners with limited business and personal credit histories.
4. The Range of Uses Is Unlimited
Short term business loans are useful tools to keep startup operations running smoothly, even when there are cash flow shortages. The money you receive from your small business lender can be used in a variety of ways to better your business. Many businesses choose to put short term business funding towards the following:
- Working capital needs
- Emergency expenses
- Cash flow issues
- Real estate or expansion
- Equipment purchases
- Marketing and advertising
- And more
Once funds are dispersed, there are very few limitations on how the cash can be utilized. Whether you want to expand your operations, invest in new business opportunities, start a marketing campaign, or finish a project requiring working capital, you can use your loan funds however you see fit.
5. There Are a Lot of Lenders
When first starting in any industry, many small business owners seek out a loan to get operations off the ground but don’t know where to start. You may be worried about running out of options, but in reality, the amount of lenders out there is plenty. There are two primary routes your startup can take to obtain short term funding:
- Banks – Banks are known for having the best rates and largest loan amounts, but it can be challenging to secure a bank loan if you don’t have excellent credit.
- Online Lenders – Online lending platforms are popular for startups because they have the least restrictive eligibility requirements for short term financing. Additionally, virtual lenders are more likely to risk lending to newer businesses without the limitations of credit score limitations and credibility capital requirements.
Unfortunately, conventional lenders like banks can be averse to startup loans since they carry a lot more risk. But luckily, modern options like online business lenders exist in endless numbers, giving every startup the chance to secure funds.
If you decide to go with an online lender for your startup loan, don’t glance over the details. Since there are so many small business lenders and loan products out there, it’s critical to complete your due diligence to ensure you’re working with a reputable online lender to receive the best loan for your startup business.
6. And a Lot of Short Term Business Loans, Too
Additionally, you won’t find any shortage of loan options in the marketplace currently. Businesses can explore a variety of term loans and business financing products to find one with the best interest rates, largest loan amounts, and lowest minimum credit score to suit their needs.
- Short term loans
- Business lines of credit
- Business credit cards
- Business cash advances
- Merchant cash advances
- Purchase order financing
- Invoice financing or factoring
Depending on your startup’s needs, one type of financing might be more beneficial than others. Businesses that rely heavily on machinery might opt for an equipment loan or financing to purchase the tools and equipment required to run daily operations.
In contrast, businesses that need specific supplies and inventory to keep things running smoothly might choose a business credit card to make necessary purchases. Lines of credit and different types of financing are available as well.
Let’s take a closer look at each kind of loan below before you make this critical decision for your startup.
The Best Short Term Business Loans for Startups
Short Term Loan
Your business receives a fixed lump sum amount upfront, with a specified repayment period spanning six to eighteen months. Typically, this type of loan is repaid in one year or less. This loan charges a “factor rate,” or fixed cost for repayment, which you will usually pay either bi-weekly, weekly, or, in some cases, daily.
It’s important to note that short term funding products cost more than bank loans and often have higher interest rates. However, loan amounts are high, and funding can come in as fast as just one day.
In addition, documentation and credit score requirements are more lenient than a traditional loan. Because of these fantastic features, this small business loan may often have higher approval rates than traditional long term loans and other financing options.
Business Lines of Credit
Business lines of credit are another excellent option for startups that need flexibility for their use of funds, although they are not actually a loan. Instead, business lines of credit act similarly to a regular credit card, allowing business owners to draw funds on demand, up to a specific limit.
In contrast to business cards and other loan types, business lines of credit don’t have a term length. However, you must renew business lines of credit annually or semi-annually for the funding to be extended.
Business Credit Cards
Business credit cards work just like the one sitting in your wallet. Swipe a plastic card or enter your designated card number into online vendor and retailer stores to purchase supplies and other necessities or simply spruce up your brick and mortar store or office.
When looking for the right business credit card for your needs, there are a few things you need to know:
- Credit limit
- Interest rates
- Repayment schedule
- Origination fees
- Processing times
- Credit requirements
Find a credit card that provides you with the funds your business needs and has terms your enterprise can keep up with from month to month.
Equipment financing is a popular tool for startups since almost every industry relies on some kind of equipment or machinery to operate, even if it’s just computers or printers. It’s important to note that this isn’t a short-term loan, but it’s still an excellent option.
The great thing about an equipment loan is that the equipment is collateralized itself, so lenders are more likely to take on the risk of this type of financing. Use funds from an equipment loan to pay for:
- Manufacturing machinery
- Trucks and vehicles
- Printers, fax machines, computers, etc.
- Shipping tools
- Point of sale (POS) machines
- Industry-specific equipment
Whether you’re in the medical field or simply running an office, equipment loans can be incredibly beneficial. The terms are typically great, documentation and credit requirements are low, and you’re allowed up to ten years to repay your equipment loans.
Invoice financing or factoring is a useful short term option for startups with many outstanding payments from clients. This short term funding product enables you to avoid waiting for the cash from unpaid invoices.
Instead of waiting around for payments from customers, your lender advances a set loan amount to the business for a small fee, which is taken directly from the final invoice payments. Invoice financing is a great way to improve cash flow quickly.
Purchase Order Financing
Purchase order financing is excellent for startups that rely heavily on supplies and inventory to run operations. When purchasing with a supplier, the supplier will request funds from your purchase order company.
Then, you can utilize the money you make after receiving said supplies to pay back the purchase order amount. After repaying your funder, the rest of the invoice payments are sent back to your business.
Merchant Cash Advance
Merchant cash advances are another financing tool that takes a percentage of the future credit card sales to repay the loan. All types of credit are considered, and you can receive funds in as few as two days. Merchant cash advances are an excellent option if you need flexibility in your repayment terms or make many credit card sales.
Business Cash Advance
Like a merchant cash advance, business cash advances are another short term financing option you can choose. However, instead of taking a percentage of future credit card sales, payments are based on overall sales in their entirety.
Securing Short Term Funding for Your Startup
If you need access to capital to continue running your small business successfully, look for short term products. These types of loans can provide your company with the funds required to keep operations going smoothly throughout the day and expand your business in the future while allowing you to stay current with your repayments.
Consult with the experts at AdvancePoint Capital to find lenders with rates and eligibility requirements that work well for your business before settling on the best short term loan for your startup.