Business Expansion

The 4 Types of Short Term Business Loans You NEED to Know About in 2020

Last updated on March 10, 2020

Jacques Famy Jr

A common question often get is: “what is a short term business loan?” The simple answer is the term “Short Term” generally means business loan financing that is 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 category of business lending, so you want to make sure you are familiar with what options are best suited for your needs.

Let’s explore the 4 types of short term business funding options that we have identified that can help you get the business funding for your business.

Short Term Business Loans

Description and Basic Features of a 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 of time 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 either be principal & interest or may be 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% up 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% up 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 greater than six months and can show sales deposits in excess of $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

The 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 to them 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.

Business Lines of Credit

Description and Basic Features of a Business Line of Credit

A Business line of Credit is business financing that is revolving credit with a credit limit that operates in a similar way to that of 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 also 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% up 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% up to 29%

What are the Qualifications for a Business Line of Credit?

Qualifications can vary from Banks and Alternative Business Lenders, but general standards are a business that has been typically operating for greater than a year and can show sales deposits in excess of $15,000 per month through a business bank account. As a guide, from a credit perspective, lenders accept credit score minimums are 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 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

The Benefits of Business Line of Credit

  • Flexible able to draw funds instantly on demand
  • No set term, revolving open-ended credit
  • Principal & Interest Rates instead for 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.

Business Cash Advance

Description and Basic Features of a 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 that is 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 that of a term loan because the agreement sets a fixed percentage of monthly sales that must go towards repayment. Repayment can fluctuate with the flow of sales, so a business can pay less monthly if sales drop. 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, unlike a business term loan.

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 greater than 6 months and can show sales deposits in excess of $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 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 business funder

The 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 type of bank business fundings. Business cash advances are easier to acquire, and the process from application to funding can be as little as a day.

Merchant Cash Advance

Description and Basic Features of a 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. A merchant cash advance 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, unlike a business term loan. This product is for Business who 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 are dependent 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 greater than 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

The 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 to them as the repayment is made by a set percentage of credit cards instead of a fixed payment auto deducted out of 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 out of 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.

Business Credit Cards

Description and Basic Features of Business Credit Cards

Business Credit Cards are very similar to that of personal credit cards in that it is a revolving line of credit with a card that is 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 and provide 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 comparison shop. Credit Cards.com, Credit Karma, or nerd wallet are excellent resources.

Credit limits: $1,000 up to $75,000,000 (with exceptions can be higher)

Term: Revolving open ended credit

Payment Frequency: Monthly minimum payments

Rates: Principal & Interest rates are typically between 0% up 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 may be 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

The Benefits of Business Credit Cards

  • Low monthly minimum payments
  • No term limit opened ended revolving credit
  • Very little paperwork 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 that 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 due have their limits as they tend to offer much less money than other business loan products.

The Bottom Line About Short Term Business Loans

When choosing to finance for your business, searching for the best option is important. With the knowledge of what’s available, business owners can make better decisions on how to get the money for their business.

Sometimes there’s not a 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 well not only be the best alternatives but the only alternative if you need money for your business. Business owners need to consider the benefits of acquiring the money with the costs and terms associated with business funding. Ask yourself as a business owner — how does this money I am financing help the business? What does the business have to gain from it? Is it worth the costs? If the answer is yes, and it’s the best option available, then you know the answer as to what to do.

Remember, this is business funding, not consumer lending. You are not using this money for clothes, trips, or personal vices; this is money being used for your business. The value of the money may be far greater than that of the cost of the money, depending on the use of the borrowed funds. The old adage still applies: “It takes money to make money in business.”

Check out How to Find the Best Short Term Business Loans and weigh all the benefits and evaluate the decision to get funding for your business. 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 are going to get from the business lender or funder, so make sure you think of the big picture and not solely focus on rate and terms.

* All loans made by either WebBank, an FDIC-insured Utah industrial bank, or Bank of the Internet Federal Bank, an FDIC-insured federally chartered thrift located in California. In connection with the loans, the Banks' underwriting conditions and terms apply.