No matter how hard you try to plan ahead, unexpected business expenses can happen to anyone. A piece of equipment that’s vital to your operations might break. You might suddenly need more inventory to fulfill a very large order that came in unexpectedly. Maybe you need a little extra working capital to pay your employees while you wait for customers to pay their invoices. In any case, you need some extra money and you need it right away. It’s times like these when many business owners turn to short-term business loans.
What Is a Short Term Business Loan?
A short-term business loan is a type of loan that’s intended to be paid off much faster than a regular business loan. While traditional business loans can take several years or decades to pay off, short-term business loans are often paid off in a matter of months, although some can last for up to three years. Exact repayment terms will vary, but most short-term business loans last for one year or less.
Some common types of short-term business loans include merchant cash advances and invoice financing.
Pros and Cons of Short-Term Business Loans
Short-term business loans are much faster and easier to apply for than regular business loans. Applying for a business loan through a bank involves filling out lots of paperwork and having to wait weeks or months to be approved and receive the funds. When business owners are facing a sudden, unexpected expense, applying for a traditional business loan simply might not be a viable option.
Lenders typically have more relaxed requirements for short-term business loans, making it easier for businesses that don’t meet the standards for a regular business loan to receive financing.
Short-term loans are also an option for business owners who need to borrow a relatively small amount of money. In many cases, business owners are turned down for traditional business loans because they aren’t seeking loans large enough to generate enough of a profit for the lender.
Some business owners use short-term loans specifically because they are short-term in nature. Since many business owners only need funding to get over temporary financial hurdles, they don’t like the idea of being stuck paying off a loan years after the original need for that funding has passed.
Small, short-term business loans can also be used to improve your business credit score. As you make progress on paying off a short-term loan, your regular payments will be reflected on your credit score. With an improved credit score, you’ll have an easier time qualifying for larger business loans with better terms later on if needed.
The biggest downside to short-term business loans is that the interest rates are higher than the rates for regular business loans. Because of the fact that these loans have shorter terms, you’ll need to make larger, more frequent payments, sometimes on a daily or weekly basis. Although collateral is often not required for short-term loans, some lenders do ask for collateral.
Uses for Short-Term Business Loans
Funds from short-term business loans can be used for many different purposes, including buying equipment, furniture, inventory, paying employees, and other general working capital needs. Given the brief nature of these loans, they’re best for handling things like sudden emergency expenses, temporary cash flow interruptions, preparing for a seasonal spike in business, and short-term expansion needs. These loans aren’t intended to be used for large, significant investments like purchasing real estate or acquiring another business.
Applying for Short-Term Business Loans
Applying for a short-term business loan is much simpler than applying for a regular business loan. As an applicant, you’ll be expected to provide things like proof of ownership of your business, bank statements, tax returns, P&L statements, and a copy of your driver’s license. Lenders will also check your credit score. Although your business credit score is still a factor with short-term business loans, lenders who offer them often place less of an emphasis on it. You may potentially be asked to provide collateral. If approved for a short-term business loan, the business owner can receive their funds within a matter of days, sometimes within 24-48 hours.
When Should I Consider a Short-Term Business Loan?