Best Short-Term Business Financing
If your business is opening a new location, acquiring a competitor, or experiencing any form of explosive growth, you might seek a long-term business loan to cover unforeseen expenses during the time of transition. But if your business is mostly steady — or even in a seasonal slump — a short-term business loan can help you bridge financial gaps when times are tight. If you’re new to the world of short-term business loans, this overview offers some insight into the nature of these financial arrangements and how best to approach the application process.
What is a short term business loan?
A short term business loan is any loan that has a short repayment period, generally less than 3 years. In some cases, a short term business loan may be less than 12 months. They allow business owners to quickly finance and repay their short-term business needs and expenses.
How do short term business loans work?
Short-term business loans are most often set up as unsecured installment loans, meaning the loan proceeds are paid back over a predetermined period of time in equal monthly payments.
In some cases, they may require an asset to be used as collateral and create a secured loan.
Short term business loans may also require payments to be made with increased frequency when compared to traditional loan terms. Depending on how short your loan repayment period is, you may need to make weekly or biweekly payments as opposed to a monthly payment.
Who can obtain short term business financing?
Any business owner who qualifies can obtain short term business financing. Every lender and lending program will have their own unique set of application requirements that borrowers will have to fulfill. Typically, lenders request financial statements, business licensing information, a written business plan, and other important information about your business. You will also need to pass a credit check and meet the minimum credit score required by the lender. Applicants who do not qualify based on their credit score may still be able to apply using a cosigner.
When applying for a business loan, the lender will also most likely require a minimum annual revenue or amount of gross monthly sales in order to qualify for a short-term business loan.
In general, established business owners will have an easier time qualifying for short-term business financing than new business owners and entrepreneurs. This is because many lenders like to see some time in business and solid financials before approving applicants for a loan.
How long is a typical short term business loan?
A typical short-term business loan ranges from between 12 months to 3 years. In some cases, they can even be shorter than 12 months. Because of their relatively short repayment periods, these loans may have financing plans that require weekly or biweekly payments. In fact, some loans may even require a payment to be made daily.
Common uses of short term business loans
Applicants can use the proceeds from a business loan for many types of qualified business expenses. Everything from debt consolidation to staffing needs can be covered with a loan.
Short-term business loans are most often used for emergencies or for temporary cash flow interruptions that require financial assistance to help fill in the gaps. Common uses include funding unexpected purchases and covering business expenses during a company’s off-season.
Short term vs. long term business loans
Short term business loans have a few advantages when compared to long term business loans.
Many business owners prefer them to pay for their expenditures because they can pay off their debts much faster. In addition, borrowers see a significant amount of savings on interest over the lifetime of the loan. Lastly, funding for short-term loans (especially from online lenders) is relatively quick, allowing you to get the cash you need for your business much faster.
On the other hand, a shorter loan term means that borrowers will need to shell out more cash each month for a higher monthly payment. Because of this higher payment, short-term loans carry a higher risk of defaulting on the loan or needing to take on a new loan or refinance.
Lastly, it may be harder for new business owners to take out a short-term business loan, as lenders generally want to see that your company has been operating for some time already.
Are short term loans better when compared to long term business loan options?
The answer to this question will depend on your financial situation and your own unique business needs. You will need to weigh your options and make an educated decision.
However, it is important to keep in mind the pros and cons of short-term loans. In addition to having a higher monthly payment, short-term loans may also be limited in how much you can borrow and are more likely to come with a variable interest rate. On the plus side, short-term loans allow your business to get back in the black much faster by paying off debt quickly. With such short repayment periods, they also accrue less interest over the lifetime of the loan.
How much does a short term business loan cost?
There are a few costs associated with taking out a short-term business loan. A short-term business loan will accrue interest and may or may not come with loan fees such as origination fees, underwriting fees, late payment fees, and early repayment penalties. This is why it is important for you to thoroughly read and understand your loan terms before applying. To get a better idea of how much you will need to pay monthly in interest, consider getting prequalified.
The typical interest rate for a business loan as of May 2022 is between 2.54% to 7.02% APR.
You may also be required to put down a down payment or pay closing costs to get your loan.
Check with your preferred lender(s) to see if they offer financing options with minimal costs.
Is a Short-Term Loan Right for My Business?
Short-term small business loans can be used for any number of reasons, but generally, these reasons fall into one of four categories. If you find yourself in any of these situations, a short-term business loan could likely be right for you.
- Operational Costs — You need to cover seasonal expenses, such as additional employees during the holidays.
- Cash Flow — If a big customer is late paying an invoice, it could offset all of your company’s finances.
- Emergencies — Natural disasters and other crises can leave you with a stack of bills you’re not prepared to pay.
- Business Opportunity — Reduced-priced purchases and unexpected ways to expand can be too good to pass up.
Fast small-business loans aren’t exclusively reserved for applicants with spotless credit reports. In fact, instant business loans are available to individuals with credit scores as low as 600. If your score is hovering around that level, two lenders you might want to look into are Kabbage and Fundbox. Learn more about them below.
Types of Short-Term Business Loans
In general, short-term business loans typically fall into one of four categories:
- Standard Short-Term Loans — 2-month to 5-year loans typically with fixed terms
- Merchant Cash Advances — An expensive way to borrow against future sales
- Lines of Credit — Flexible funding you can access and repay on your own terms
- Invoice Financing — To cover costs when customers don’t pay their bills on time
» MORE: Types of business loans
What Are Short-Term Lines of Credit?
Many business owners who are exploring their options regarding short-terms inevitably stumble across offers for short-term lines of credit as well. Lines of credit are more flexible than short-term loans when it comes to repayment, and lines of credit are open-ended, meaning you can borrow and repay funds year after year at your own discretion. And when it comes to interest, short-term business loan rates are usually at least a few percentage points higher than lines of credit for similar amounts.
Short-Term Lines Of Credit Providers
If you need to bridge gaps in your cash flow, these lenders will likely be able to help you.
|Loan Amounts||$2,000 to $250,000|
|APR Range||24% to 99%|
|Repayment Terms||6 to 12 months|
|Time to Funding||A few minutes to several days|
|Click “Check Rates” to apply to Kabbage|
» MORE: Kabbage Business Loan Review
|Loan Amounts||$1,000 to $100,000|
|APR Range||10.1% to 79.8%|
|Repayment Terms||3 to 6 months|
|Time to Funding||A few minutes to several days|
|Click “Check Rates” to apply to FundBox|
» MORE: FundBox Business Loan Review
|Loan Amounts||$5,000 to $250,000|
|APR Range||15% to 78%|
|Repayment Terms||6 or 12 months|
|Time to Funding||As fast as 24 hours|
|Click “Check Rates” to apply to Blue Vine|
» MORE: BlueVine Business Loan Review
Pros and Cons of Kabbage, Fundbox and Blue Vine Short-Term Lines of Credit
If you decided to apply for a line of credit from any of the aforementioned lenders, here’s a quick look at each of their pros and cons.
- Pro: Applicants only need a minimum credit score of 560
- Con: Kabbage is more expensive than other options
- Pro: Fundbox does not require a minimum credit score
- Con: Repayment terms are limited to 3 months
- Pro: Applicants only need to have been in business for 6 months
- Con: Requires a higher level of income than other lenders
For Businesses With Annual Revenue Under $100k
If your business is still in its early stages, some lenders might be hesitant to let you borrow money. The below lenders, however, have more relaxed requirements when it comes to business revenue.
- Fundbox: Minimum revenue requirement is $25,000 per year
- Kabbage: Minimum revenue requirement is $50,000 per year
- StreetShares: Minimum revenue requirement is $75,000 per year
- LendingClub: Minimum revenue requirement is $75,000 per year
Short-Term Loans for Businesses Less Than 1-Year-Old
If it’s your business's age — not its revenue — that seems to be a stumbling block with some lenders, you still have options. In order to qualify for a loan from either BlueVine or Fundbox, you simply need to prove your business has existed for at least 6 months.
Short-Term Business Loans for Credit Scores Under 600
If your credit score isn’t anything to brag about, that won’t necessarily preclude you from qualifying for a short-term business loan from Kabbage, Fundbox, or OnDeck.
- Kabbage considers several other factors in addition to an applicant’s credit score
- Fundbox looks at a business’s finances rather than the credit history of the business owner
- OnDeck only requires a credit score of 500 to get approved
Short-Term Business Loans
If you need fast cash, here are four of the most popular lenders to choose from along with a quick look at their pros and cons.
- Pros: High borrowing amounts, fast funding
- Cons: Expensive financing, frequent repayments
- Pros: Only requires $25,000 annual income, no prepayment penalties
- Cons: Funding maxes out at $150,000
- Pros: Loans up to $250,000, only requires a credit score of 550
- Cons: Requires an annual revenue of at least $200,000
- Pros: Lower interest rates than many other lenders, repayment terms up to 4 years
- Cons: Requires a credit score of at least 620 and annual revenue of at least $100,000
For Low-Interest Rates
If qualifying for a loan isn’t an issue for you, and you’re simply seeking the lowest interest rates around, a good place to start looking is Credibility Capital. You’ll need to have a high credit score to get approved by Credibility, but for qualified applicants, APRs can be as low as 10%.
» MORE: Low interest business loans
Pros and Cons of Short-Term Business Loans
Still on the fence about whether a short-term business loan can solve your problems? Here’s a quick look at the pros and cons.
- Pros: Fixed repayment structure, easy to apply, funding available as soon as the same day
- Cons: More expensive than long-term loans, some loans require rapid repayment
When to Avoid Short-Term Business Loans
Short-term loans can be a saving grace for businesses in dire circumstances, but that doesn’t mean choosing one is always the right thing to do. If you encounter any of the following red flags during your search for a short-term business loan, we recommend looking elsewhere for a financial institution that can meet your needs.
- Exorbitant fees or interest rates that are unreasonably high
- A requirement for more frequent repayments than other lenders ask for
- Unpredictable repayment amounts that fluctuate throughout the life of the loan
- Confusing terms that you can’t make heads or tails of
How can I qualify for short term business financing?
In order to qualify for short-term business financing, you will need to meet all of the loan application requirements set forth by the lender. Typically this requires a heavy load of legal paperwork and financial documentation including financial statements and a business plan.
In addition, you will need to meet the lender’s minimum requirements for your credit score. A credit score in the upper 600s is ideal, although some online lenders are willing to approve applicants with much lower scores. For example, Credibly accepts applicants with scores >500.
Many lenders require a minimum amount of time that your business has been in operation. For example, Funding Circle only considers applicants who have been in business for 2+ years.
Lastly, you may be subject to annual income or gross monthly sales requirements to get a loan. For example, OnDeck wants business owners to have an annual revenue of $100,000 or more.
Is a short term loan right for your business?
Short-term loans can be a great idea for many business owners, especially in emergencies or in temporarily reduced cash flow situations. You will need to evaluate the pros and cons of a short-term business loan for your own unique financial situation based on the amount you need to borrow, the estimated monthly payment and the interest rate you can expect to receive. Getting prequalified from a variety of different lenders or lending programs can help you get a better idea of whether or not a short-term loan is right for your business.
How to take out a short term loan for your business
In order to take out a short-term business loan, you will need to submit an application either in person or online with a lender that you have selected. Banks, credit unions, and online lenders all offer different business loan products for consumers to choose from. Each of these financial institutions has their own pros and cons when it comes to utilizing their business loan services.
Online lenders are often the best option for taking out a business loan due to their lenient requirements, flexible underwriting process, and quick funding (typically within 1-2 business days). Credit unions are also known for being relatively flexible and offering personalized customer service to their banking clients.
On the other hand, traditional banks that offer SBA-backed loans and microloans often have some of the most favorable interest rates and loan terms, although loan approval may take up to 60 days and require more red tape than other options. The big name banks are more likely to offer long-term business financing ranging from 3-10 years all the way up to 25 years.
When you apply for a short-term loan, you will most likely need to submit a great deal of paperwork including profit and loss statements, tax returns, and a detailed business plan.
In order to get the best deal on your short-term business loan, it often pays to compare offers online. Compare the loan terms, loan fees, and interest rates from a few different lenders in order to find the best lending program for you and land the lowest possible rate. Saving money on your business loan allows you to put more cash back into your business.
How PrimeRates Works
PrimeRates provides access to personalized business loan offers through our simple and quick pre-qualification application. Once you're pre-qualified, you can select the best offer for you and finalize the business loan application with the lender.
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