Types of Short-Term Business Loans and How They Work
Running a successful business often means needing access to capital at various stages. Whether you're looking to cover unexpected expenses, buy new business equipment, or bridge a cash flow gap, short-term business loans can give your business the financial boost you need.
In this article, we'll dive into everything you need to know about short-term business loans, including the pros and cons, the application process, and more.
How Short-Term Business Loans Work
A short-term business loan is like other business loans but usually has a shorter repayment period. Generally, you will be asked to repay the loan in under 24 months. Because the repayment terms are condensed, lenders may ask you for weekly payments rather than monthly payments.
With short-term financing, you can get a lump sum of cash from a lender to help you run your small business. The funds can be used for pretty much anything you need to run your business, from helping with seasonal cash flow to buying business equipment or paying for a new product line.
Short-term business loans can be secured or unsecured, meaning you may need to pledge an asset as collateral for the loan. You can get short-term loans from traditional banks or credit unions, but they’re usually offered by online lenders like Backd. For example, Backd offers short-term finance offerings that are more flexible and easier to apply for than those from more traditional lenders.
Types of Short-Term Business Loans
There are a few different types of short-term business loans and financing options. Here are some of the most common ones:
Business line of credit: With a business line of credit you withdraw funds when and as you need them, up to an approved amount (similar to a credit card). You pay interest on the funds you use and can withdraw the funds as often as you want, as long as you still have credit available. Business lines of credit are best when you need flexible funding.
Term loan: With a business term loan, you get a lump sum and pay the lender back over a set period of time. It’s similar to other traditional loans except that you pay it back in a shorter time frame. These can also be referred to as bridge loans.
Invoice factoring: Invoice factoring is when you sell your invoices to a company that gives you a portion upfront, then collects the invoice payments and keeps a percentage. This type of financing can be used to help improve cash flow, especially if you’re dealing with slow-to-pay customers.
Working capital advance: A working capital advance is when a lender gives you funds to quickly cover shortfalls, buy inventory, or cover day-to-day expenses. They can be used to boost your cash flow and can be a good solution if your business goes through seasonal shifts.
Pros and Cons of Short-Term Business Loans
Before deciding if a short-term business loan is right for you, it’s a good idea to weigh the benefits and downsides.
Flexible uses: Short-term business loans usually don’t have the same restrictions that long-term loans might. You can use the funding for pretty much anything that you need to run your business, making them best for immediate or unexpected expenses.
Quick approval process: Some short-term lenders can approve financing in as little as one business day. That means you can get your funding quicker than other more traditional lenders.
Easier to get approved: It is often easier to get approved for a short-term loan than a long-term loan from a traditional bank, for instance. Small business owners with fair credit may find it easier to get funding with a short-term loan.
Can be expensive: Short-term business loans may have higher interest rates and fees compared to long-term loans.
Risks of getting into debt: Because short-term business loans are easy to get, you can risk falling into debt if you can’t keep up with your payments. This can lead to a cycle of debt, as you need to take out other loans to finance the loans you took out previously.
When to Consider a Short-Term Business Loan
There are various reasons why a business might consider a short-term business loan. In most cases they are best for companies that:
Have a budget shortfall
Need cash due to a cash flow interruption or seasonality
Don’t have collateral
Want to quickly take advantage of a business opportunity
Have a sudden emergency expense
Short-term loans are usually designed for companies that need help paying for their day-to-day operations. But because they need to be repaid quickly, they aren’t best for businesses that can’t pay back the funds in a short time period.
How to Get a Short-Term Business Loan
The exact process for getting a short-term loan will vary by lender and the type of financing you apply for. However, most likely you will take the following steps to get funding:
Figure out your financial needs: Before you find a lender, you first need to determine what business financing you need. Why does your business need a short-term loan? Do you need cash right away, or would a line of credit make more sense? Will you be able to make weekly payments right away? Figuring out what your financing needs are first will help you figure out which loan (and lender) are best for you.
Determine your eligibility: Once you know what type of loan makes sense, you need to know if you qualify for a loan. Start by finding out your business and personal credit score. You’ll likely need to have a minimum credit score for approval or to get a decent interest rate. Lenders may also want to know other details about your business, such as how long you’ve been in operation, your annual revenue, your business plan, or other documents, such as bank statements or tax returns.
Compare loan options: Before you submit your loan application, you’ll want to shop around for different loan offers. Consider things like the available loan amounts, interest rates offered, repayment terms, and ease of applying. You can also read online reviews or get recommendations from others in your industry.
Submit an application: Many lenders offer streamlined online applications that make it easy to apply. Be sure to have any documentation ready that your lender may require as part of the application.
Review and close the loan: Once you have an offer, make sure to review the fine print so you understand the terms and conditions. If you decide to accept the financing, you can sign the agreement.
Find the Right Loan for Your Business
Whether you need cash to replace an essential piece of machinery that broke down, or you need fast funding to pay your employees until your invoices come through, short-term small business loans may be the right option. They are often easier to apply for and have more flexible terms. However, unlike traditional bank loans, short-term loans have shorter repayment terms, so you’ll need to make sure you’ll be able to pay it back in that period of time.
Backd, for example, offers two types of short-term financing options: a working capital advance and a business line of credit. With a working capital advance, you can get up to $2 million in funding, a term length of up to 16 months, and automatic daily, weekly, or semi-monthly repayments. A business line of credit gives you access to up to $750,000 that you can repay weekly over six or 12 months.
Apply today, and find out if you qualify in just 24 hours.