A short-term business loan is designed to give small businesses fast access to funding to cover short-term capital needs. Typically, short-term business loans are used for managing cash flow, handling emergencies and unexpected opportunities, as well as bridging larger financing solutions.
Generally, a short-term business loan has terms of one year or less (sometimes 18 months or less) and is structured as a lump sum loan with repayments made on a daily or weekly schedule. Compared to other business loans, short-term loans often have smaller loan amounts and higher interest rates—but fund much more quickly.
Although some banks may offer this type of financing, short-term small business loans are most commonly available from alternative, online lenders. In this way, with streamlined application processes, fast funding, and flexible requirements, short-term loans are a great option for a variety of small businesses with a range of short-term financing needs.
Although there are a few different types of short-term business loans (which we’ll discuss below), most often these loan products are structured as straightforward business term loans.
In other words, you receive a set amount of capital from a lender upfront, and agree to pay it back, with the lender’s fees and interest, over a predetermined amount of time. As we mentioned above, short-term loans are most often available from alternative lenders, but can also be issued by banks.
Generally, short-term small business loans can be used for a variety of purposes, including:
Overall, due to the urgency often associated with short-term business loans, these products are typically offered by lenders with online-based, streamlined application processes, who can fund them in just a few days.
On the whole, short-term business loans have terms of one year or less—although some lenders consider terms of up to 18 months as “short term.”
Generally, you’ll be required to make payments on your loan on a daily or weekly basis, whereas longer-term loans will have a monthly payment schedule. Similarly, whereas longer-term loans might be available in amounts exceeding $500,000, you’ll find short-term loans are usually available in amounts of $500,000 or less—sometimes, even $250,000 or less.
This being said, interest rates on fast short-term business loans will range based on the lender and your business’s qualifications, but you’ll typically find that they start around 10% and can reach as high as 65%. Compared to other types of business loans, short-term small business loans have higher interest rates, as the speed and ease of application makes this financing a riskier deal for the lender.
Of course, the better your business’s qualifications, the better rates you’ll be able to receive on a short-term loan.
With this overview in mind, let’s break down a short-term business loan example—this will not only give you a better understanding of how most of these loans work, but will also offer insight into how much they cost.
Let’s say you’re offered a short-term loan of $100,000 with a repayment term of 12 months. You’ll be making weekly payments on the loan, which has an interest rate of 10% and origination fee of 5%.
To determine the true cost of this loan, you’ll want to plug in that information to a term loan calculator in order to calculate the APR and estimate your weekly payments. With this short-term loan example, therefore, you’ll find that your weekly payments will be $488.89—and the total cost of the loan will be $110,000—putting your APR at 6.93%.
All in all, with weekly payments and a 6.93% APR, this is a pretty affordable short-term business loan.
This being said, however, it’s important to note that some short-term lenders will charge interest differently, in the form of a factor rate, instead of a traditional interest rate. In this case, you might see a lender offer you a $100,000 short-term loan with a factor rate of 1.18.
In order to calculate the total cost of the loan here, you can either use a calculator (like we did above) or simply multiply 1.18 by $100,000 to get $118,000. Although, on the surface, this may not seem like much, you have to consider the repayment terms here too.
If the lender wants you to pay back the total loan amount on a daily schedule, over 12 months, you’ll be making 264 payments over that term (22 payment days per month). In this case, the amount of each of those payments would be $446.97, making the APR 33.98%—which is significantly higher than the rates of traditional term loans.
To this point, you’ll want to be careful with any short-term lender that charges a factor rate—as this rate doesn’t truly indicate the total cost of the debt. Additionally, these two examples also illustrate the difference between daily and weekly payments. Overall, weekly payments will be much easier to afford, so you’ll want to keep this in mind as well when comparing loan offers.
As we mentioned and described in our example above, typically short-term business loans are structured like any other traditional term loan. This being said, however, there are other variations on this type of financing, so you’ll want to keep these options in mind when trying to determine if a short-term loan (or which) is right for your business:
When it comes down to it, although there are a variety of different types of short-term business loans available from both banks and online lenders, this type of financing won’t be right for every small business owner.
Therefore, to help you determine whether a short-term loan is suitable for your business, we’ve broken down the possible advantages and disadvantages below:
At this point, if you think a short-term loan might be right for your business, you’re likely wondering where to find one.
Luckily, as we’ve explained, these loans are available from a wide variety of lenders—which means you’re likely to find one that can meet your needs. In addition, this means you can compare and contrast what different lenders offer so that you can find a short-term business loan with the most ideal rates and terms.
This being said, although you might be able to find a bank that offers a short-term loan, these options are not very common—especially if you’re looking for fast funding. Therefore, you might start your search process by looking into the following short-term lenders:
Ultimately, these are just five of the many lenders on the market that offer short-term loans for small businesses. If you think a short-term loan is suitable for your business, therefore, your first step to actually getting a loan will be choosing one or multiple lenders to work with.
After this, the process of getting a short-term business loan comes down to two pieces—first, determining whether or not your business will qualify—and second, completing the business loan application.
Generally, the specific qualifications you’ll need to meet will vary based on the lender you’re working with. After all, as we saw above, each lender will have standard qualifications for their loan products.
However, as we’ve discussed, the requirements for a short-term business loan will be much more flexible than other types of loans. For example, whereas SBA and bank loans often require two or more years in business, many short-term lenders will work with startups, including those that have less than a year in business.
To this point, many short-term business lenders emphasize cash flow more than lenders of traditional term loans. If you have a strong cash flow, you may be able to overcome other requirements that would typically disqualify a business for a longer-term loan.
In general, if you have a credit score of 600 or higher, at least one year in business, and an annual revenue of $100,000 or more, you should be able to qualify for a short-term business loan. Of course, it’s important to remember that your business’s qualifications will impact your interest rates—the better your qualifications, the lower interest rates you’ll be able to receive.
Once you’ve determined that you think you can qualify for a short-term business loan, you’ll be ready to actually complete and submit your application. As we’ve discussed, alternative lenders typically offer some of the fastest and straightforward processes on the market, allowing you to complete your application in only minutes, with limited documentation.
This being said, the specific information and documentation you’ll need to provide will vary based on the lender. On the whole, you can expect your application to require:
In addition, many short-term lenders will require that you sign a personal guarantee on the loan. Typically, fast short-term business loans don’t require collateral, however, some lenders may place a blanket lien on your business once you’ve funded with them.
Overall, most short-term small business loans can fund in one to two days. This being said, before you agree to any offer, you’ll want to ensure that you understand all the terms, rates, fees, conditions, and compare it to other lenders to get the best deal for your business.
At the end of the day, if you’re a business owner looking for working capital, there’s no doubt that a short-term business loan is worth considering.
Although these loans may have higher interest rates in comparison to bank or SBA loans, the speed, ease of application, and flexible requirements often make them a suitable investment for covering cash flow gaps, investing in new opportunities, or handling emergencies.
Therefore, if you think a short-term loan might be right for your business, you’ll want to compare multiple offers (keeping in mind the total cost of the debt) to find the one that’s most affordable. Ultimately, the best loan for your business is always the lowest-cost loan.