Undoubtedly, this may have raised some questions in your mind – aside from the obvious shorter term, what makes a short-term business loan different, and why should you choose it over a longer-term loan?
Does it cost less or offer some distinct benefits? Are there certain cases where a short-term loan might make more sense than a longer-term loan, or a credit product, or other kind of small business financing? You’re not alone in these thoughts.
While the most committed small business owners seek to learn everything they can about the world of business finance, no one expects you to be an expert.
Finance and banking can often seem like a somewhat dry topic, and despite your best efforts, you’d be forgiven for not taking to small business financing like it was the latest thriller or murder mystery podcast.
Yet, in order to do your job as a small business owner, and ensure you have all the facts to make the best decisions for your business, it’s helpful to understand some of the details about various types of small business funding, and how they compare to one another.
To that end, we’ve put together this brief guide to short-term business loans and their role in small business financing.
Hopefully, by the time we’re done, you’ll have answers to all the questions we posed at the start, and be a bit better prepared when you need to navigate the world of small business financing in the future. Let’s get started!
Short-Term Business Loans vs. Long-Term Business Loans
In a nutshell, short-term business loans differ from long-term business loans by their loan term – this much should be obvious from the name.
Typical small business loans, that are not short-term in nature, may be offered with loan terms of a few years to several years, such as 2 or 3 years to as many as 10 years or more in some cases.
By contrast, short-term small business loans usually have a loan term on the order of several months to a year or two at most.
This is the period in which the loan remains outstanding, and payments are made to repay the principal and interest, usually in fixed, equal amounts across the loan term.
Next, because of the shorter term nature of a short-term business loan, they are considered somewhat riskier for lenders than a longer-term loan. The faster repayment cadence means there is a greater risk of a borrower defaulting on the loan.
As a result, short-term small business loans, like many kinds of short-term business funding, tend to have somewhat more difficult-to-meet qualification requirements as compared to their longer-term brethren.
This may translate to higher credit score requirements, greater revenue requirements, a longer time-in-business requirement, lower maximum loan amount, or a combination of the above depending on your chosen lender.
Finally, the repayment schedule itself is another way in which short-term business loans and longer-term loans differ. Most ordinary or long-term small business loans will have a payment schedule that requires monthly repayments, or, less typically, weekly.
Short-term business loans will almost always have either a weekly repayment schedule, or even daily in some cases.
This faster repayment cadence is necessary to address the shorter loan term, and can be both a benefit and a disadvantage to short-term business loans, depending on how you deploy the loan or what kind of expenses you intend to use the proceeds for in your business.
Ideal Uses for Short-Term Small Business Loans
On that point, it’s worth discussing some of the ideal uses for short-term small business loans, and how best to put them to work for your business.
One of the guiding principles behind all kinds of small business financing is to choose a loan or credit product whose term, repayment schedule, and other details most closely align with your planned project or expense for that money.
Put another way, short-term business loans are ideally suited for short-term expenses, which will “bear fruit” or yield revenue from that investment within the relatively short loan term.
Longer-term loans are more well-suited to projects or expenses that won’t generate enough revenue to repay them for a longer period of time.
With that understanding, it’s clear to see that there are some immediate ideal uses for short-term small business loans and short-term business funding in general, including:
- Purchase order financing/buying inventory or raw materials to turn into your finished products for sale
- Marketing campaigns or growth initiatives projected to provide a return on investment within the time period of the loan
- Seasonal up-staffing, added shifts, or additional leased equipment for a busy time of year or a particularly challenging production cycle
- Providing a working capital buffer during an anticipated period of limited cash reserves or substantial accounts payable pending
- Making payouts that will be reimbursed in short order by insurers, vendors, or clients
Naturally, every business is different, and the ideal use of a short-term business loan in your business may vary from these examples.
Just remember the guiding principle, to match or align short-term business funding with short-term expenses or projects, which will provide revenue over the short term (or are otherwise going to be reimbursed from other business activities), and you will be well on your way to limiting the cost of borrowing, and getting the most out of your small business funding.
Additional Considerations for Short-Term Small Business Loans
There are two additional aspects of short-term small business loans that are worth considering before you take on any small business funding. First is the matter of businesses with bad credit or a limited credit history, and whether they can qualify for a short-term business loan.
Second, and perhaps most important, is the cost of borrowing – the interest associated with a short-term business loan – and how that compares to other small business funding options.
On the first point, it’s understandable that many small businesses, especially those who have only been in operation for a year or sometimes even less, may have a limited credit history, or find it hard to qualify for small business loans.
This can limit the availability of loans and credit products with many lenders, especially banks and traditional financial institutions.
The good news is that private, non-bank lenders are far more likely to offer reasonable small business funding options, even to newer business, with lower credit scores and less revenue.
For short-term business loans with bad credit, private lenders are definitely the best way to go to maximize your odds of approval.
Regarding the costs of short-term small business loans, sometimes business owners are scared off by what they see as higher interest rates, especially as compared to other, longer-term small business loans. This can be misleading, however.
Loan interest rates are usually expressed as an APR, or annual percentage rate. If you have a short-term business loan of $10,000 over 6 months, with an APR of 20%, in reality, you will only be paying 10% (because the term is only half a year).
Specifically, assuming a weekly repayment schedule, the loan will cost you $528 in interest over its life. Compare that to a $10,000 longer-term loan over 2 years, with an APR of just 10% rather than 20%, and monthly payments, where you would be paying a total of $1,075.
Despite the lower interest rate, the longer loan term means you’ll be paying more than double the interest! You can immediately see why short-term business loans are a more attractive and more affordable option for short-term expenses and projects!
Short-Term Business Loans from BizFly Funding
Hopefully our guide has helped you become a bit more knowledgeable about short-term business loans.
If you are an entrepreneur or small business owner, and in need of small business funding, including short-term business loans, then consider borrowing from a leading private lender in the US, BizFly Funding.
BizFly Funding exclusively serves the needs of the small business community, offering a comprehensive range of small business financing products.
The minimum requirements to qualify for most small business funding options at BizFly Funding are quite easy to meet, with competitive interest rates, a fast and easy online application, outstanding customer service, and no collateral requirements.
To learn more, or to start the application process for your short-term business loan, visit BizFly Funding at https://bizflyfunding.com.
Frequently Asked Questions about Short-Term Business Loans
The requirements to get a short-term business loan will vary from lender to lender. In general, however, it is possible to get a short-term business loan with bad credit.
Short-term business loans are somewhat harder to qualify for than longer-term small business loans, but are usually easier to acquire than a line of credit, for example.
Most of the time, you’ll have higher approval odds when seeking a short-term business loan with bad credit when you choose a private lender, rather than a bank.
Private lenders usually have more generous credit score, revenue, and time in business requirements, and serve a wider range of clients by credit score than do banks.
Start-up or venture capital lending is a somewhat different category of small business funding than short-term business loans.
While there may be some overlap, depending on the lender, most companies offering small business funding, including short-term business loans, don’t take on start-ups or offer “seed money”.
With that said, the revenue and time in business requirements or qualifications for a short-term business loan at many private lenders is relatively low, and can be reached by many small businesses within their first several months to less than a year of operation.
Some banks offer short-term small business loans, whereas others do not.
As is the case with most forms of small business funding, banks tend to have higher and harder-to-meet qualification requirements for borrowers, as they are more averse to risk and less willing to lend to small businesses.
They may also only offer secured loans, which have collateral requirements, and a much longer application and approval process.
By contrast, private, non-bank lenders tend to have more easily-met requirements, offer unsecured loans with no collateral requirements, have faster funding and application processes, and be a more ready source of short-term small business loans for many business customers.
In addition to short-term business loans, there are a few other types of small business funding that can also be deployed over the short term effectively.
First is a business line of credit, which actually has no term at all.
Rather, it is a revolving facility, somewhat akin to a credit card, that provides a credit line maximum, and unlimited borrowing (in whatever amounts you require) so long as your outstanding balance is below that limit.
You then repay the principal over time, with interest based only on the outstanding balance amount.
Second is a merchant cash advance, which isn’t technically a loan, but usually operates over a short time period.
A merchant cash advance provides proceeds up-front, essentially allowing you to pre-sell your future debit or credit card sales to the lender, at a discount to provide for interest.
Repayment takes place based on your sales, automatically, and not based on any calendar date or schedule.
That makes it far more flexible and less risky for businesses that are sales-based, and may have highly volatile revenue cycles.
Short-term business loans may have different loan terms depending on the lender, borrower, and other factors.
In general, though, they are usually a few months in length on the short end, to no more than a year or two on the longer end.
What defines them as short-term business loans is that they usually have a shorter term than other, longer-term loans offered by the same lender, and have a more frequent repayment requirement, such as weekly rather than monthly, along with somewhat stricter lending requirements than a longer-term loan.
