This kind of small business funding option has gained traction in recent years, though it is somewhat different than traditional small business loans in terms of form, function, and use.
While it may not be ideal for every small business, it is another tool in the toolbox of small business funding options, and is worth considering for your small business needs.
Learn more about short-term small business loans, their ideal uses, advantages, disadvantages, variations, and eligibility requirements below.
The Basics of Short-Term Small Business Loans
A short-term small business loan, as the name implies, is a loan product designed to provide short-term funding for small businesses. It is an unsecured loan, meaning there are no collateral requirements.
However, it works a bit differently than simply a “short-term” version of a traditional loan. Rather than an interest rate, short-term small business loans use something called a factor rate.
The difference is that a factor rate is calculated only once on the loan, and defines the total cost of borrowing, regardless of the outstanding balance. This means that, even if you pay off the principal early, the total cost of borrowing to your small business will be the same.
Short-term small business loans still provide a lump-sum up-front payment, and are typically designed to be repaid over a short period of time (6 to 24 months), rather than the multi-year or multi-decade durations of other small business funding products.
The repayment process is somewhat different as well compared to traditional small business loans.
Rather than monthly or annual repayments, short-term small business loans usually come with a daily repayment requirement, that is fixed and not tied to sales or revenue like a merchant cash advance.
Ideal Uses and Business Fit for Short-Term Loans
Naturally, given the requirements for daily repayment, short-term small business loans won’t be a good fit for every business.
Their primary uses include cash flow management, inventory or purchase order funding, working capital, and some forms of limited, short-term expenses like seasonal up-staffing.
They’re particularly good fits for businesses that have fairly regular sales or revenue, which make them a good fit for most merchants who sell any kind of goods and some services.
Small business funding like this works really well for retailers, restaurants, kiosk-style businesses, and similar businesses that have regular daily sales receipts.
On the flipside, small businesses that have significant periods with no cash flow, highly inconsistent income or receipts, or are primarily project-based or service-based businesses might find other forms of small business funding more manageable and appropriate for their needs.
Advantages and Disadvantages of Short-Term Small Business Loans
The exact advantages and disadvantages of short-term small business loans for a particular small business is going to depend on the intended use, the type of business, and exact business needs, of course.
In general terms, however, the key advantages and disadvantages of this kind of short-term funding for small businesses can be summarized as follows:
Advantages
- Unlike several other types of small business funding, short-term small business loans don’t generally have specific revenue/income requirements as part of their eligibility criteria. This makes them more accessible for many businesses.
- Short-term loans often are quicker and easier to obtain, with less documentation, paperwork, or approval delays.
- Like many types of small business loans, there are usually no restrictions or requirements on the use of the funds. Small business owners can choose how best to use the proceeds of their short-term small business loans to improve their business and financial situation.
- Short-term small business loans are almost always unsecured, meaning there are no collateral requirements, which lowers the risk for small business owners.
Disadvantages
- The factor rate and fees associated with short-term small business loans can be significant compared to other forms of secured and unsecured short term funding available from small business lending
- Repayment is daily, which can be difficult to manage (and typically starts right away), meaning there isn’t a great deal of grace period or “stress-free”/low-worry time after receiving the loan funds before you need to start monitoring your repayment and compliance.
- There are no real incentives or money-saving options with early repayment. In fact, some small business lenders may have penalties in place with early repayment.
Even absent that, the fixed fees from the factor rate mean that, if your business finances improve and you are able to repay the loan early, you’ll still be on the hook for the full amount due, as it is not calculated on the outstanding balance on a monthly or annual basis like other types of small business loans.
Other Types of Short-Term Business Loans
There are a few variations on this kind of short-term small business loan as well, depending on the small business lender in question. Specifically, there are some kinds of short-term small business loans that operate just like traditional loans, only over a short maturity term.
There are also merchant cash advances, which provide similar benefits to a short-term small business loan, but with a twist: repayment is based on credit card sales receipts, and is not a fixed amount every day.
Rather, as business improves, and sales increase, repayment is higher, and if business decreases, the repayment decreases.
For many merchants, these two other types of short-term business loans and credit products may be useful in conjunction with, or instead of, the kind of short-term small business loans we’ve been discussing here.
Qualifying for a Short-Term Small Business Loan at BizFly Funding
With BizFly Funding, you can obtain all different types of small business funding, including short-term small business loans.
The qualification requirements for short-term small business loans are fairly straightforward and basic. Most business can be approved in as little as a few hours, and receive their funds within 24 hours after that.
Specifically, BizFly Funding short-term small business loan eligibility requirements are:
- Your business must have been in operation for at least 1 year (12 months).
- Your business must have a credit score of at least 600.
- Your business must generate at least $10,000 in monthly revenue.
