Short-Term Business Loans

Flexible, fast, and affordable, short-term business loans are a vital lifeline for America’s small businesses (the average small business loan amount hovers around $70,000). Why? No matter how hard you try to plan ahead, unexpected business expenses can happen to even the most organized small business owner. 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 business loan that’s intended to be paid off much faster than a regular business loan. While longer-term loans from a traditional bank or lender can take several years or decades to be paid off, short-term business loans are often paid off in a matter of months, although some can last 18-24 months (or more). Exact repayment terms will vary, but most short-term business loans last for one year or less. Short-term commercial loans are often used to help small business owners cover temporary cash flow gaps. Seasonal businesses are particularly prone to inconsistent cash flow and make a large portion of their annual revenue in a short period (such as the summer). These businesses may benefit from a short-term loan that provides cash upfront without the longer-term debt of traditional financing options, such as bank loans or SBA loans.

The Best Types of Short-Term Business Loans

Line of Credit

This is a flexible loan that provides businesses with access to a fixed amount of money, which can be used when needed. Interest is only paid on the amount used, making it a cost-effective solution for many businesses.

Invoice Financing

This loan type allows businesses to borrow money against outstanding invoices. This can be a great option for businesses with a lot of unpaid invoices, needing to smooth over cash flow.

Merchant Cash Advance

While not technically a loan, a merchant cash advance allows a business to sell a portion of their future credit card sales for a lump-sum advance to a buyer. The business must then remit a portion of their future receivables to that buyer on a daily or weekly basis.

Short-Term Loan

These loans are typically for a year or less and are best for businesses needing quick, temporary cash flow. They often have higher interest rates but can be approved quickly.

Equipment Financing

This type of loan is specifically for businesses that need to purchase or upgrade equipment. The equipment itself acts as collateral, which can make these loans easier to obtain.  

How Do Short-Term Business Loans Work?

Short-term business loans are a type of financing designed to provide quick cash flow to businesses in need. These loans typically have terms that are around a year and a half or less, and they can be great tools for handling unexpected expenses or capitalizing on sudden opportunities. When a business applies for a short-term loan, it typically goes through an online application process that can take just a few minutes. After the application is submitted, approval can often be secured rapidly – sometimes even on the same day the application is placed. This is one of the main advantages of short-term loans: they allow businesses to get the funds they need very quickly. Once the loan is approved and the funds are received, the business is required to start making payments. Unlike other types of loans, the repayment schedule for short-term loans can be quite frequent. This could be as often as once a week, or in some cases, every business day. While the frequency of the repayment schedule might be burdensome for some businesses, it can also mean paying less in interest and fees overall, and the chance to improve a bad credit rating.

Pros and Cons of Short-Term Business Loans

Short-term small business loans can help business owners survive a tough time or seasonal slump in revenue, but there are some cons to consider as well. Here’s what to know about short-term business loans.

Pros of Short-Term Business Loans

Faster, Easier Application Process

Short-term business loans offer a much faster and easier application process than regular business loans. Applying for a business loan through a bank involves filling out extensive 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.

Lower Eligibility Requirements

Short-term loan lenders offer, typically, more relaxed requirements for short-term business loans, making it easier for businesses that don’t meet the qualifying criteria for a long-term business loan to receive financing. This can be especially helpful if you have a lacking credit history or don’t meet the credit score requirement for other loans.

Flexible Loan Amounts (and Lower Costs)

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 (and, frankly, you’ll be better off not paying the hefty prepayment penalties for paying off your loan early).

Pay It Off Fast

Some business owners use short-term business financing specifically because it’s 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.

Improve Your Credit Score

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.

Cons of Short-Term Business Loans

The biggest downside to short-term financing is higher short-term business loan rates (and possibly origination fees) than 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 short-term loan lenders ask for collateral, especially for equipment loans and other collateral loans.

Uses for Short-Term Business Loans

Funds from short-term commercial loans can be used for many different purposes, including:

• Buying equipment
• Furniture
• Inventory
• Paying employees
• Emergency repairs
• Enhancing your products and services
• Other general business 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 financing needs like purchasing real estate or acquiring another business.

Applying for Short-Term Small Business Loans

Applying for a short-term business loan is much simpler than applying for a regular business loan. The loan application and application process will vary depending on the short-term loan lenders. If you choose an online lender, you will likely be able to complete the entire application process online. 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. Short-term business lenders will also check your business or personal 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 1-2 business days and often as a direct deposit to their bank account.