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What is a short term business loan?

A short-term business loan is a type of small business financing that enables business owners fast access to generally small amounts of working capital. Primarily, business owners pursue short-term loans when they have immediate financing needs such as emergencies, cash flow issues, or even a business opportunity they want to seize. 

These loans, which come in a few different primary types, can be slightly more expensive due to their ASAP nature. But, in good news, they’re not among the hardest-to-access loans, which means that small business owners without perfect credit scores or business financial history may be able to gain approval.

An overview of short-term business loans

  • Highly flexible uses of funds
  • Bad credit sometimes accepted
  • Quick approval
  • Smaller loan amounts
  • More frequent, sometimes higher payments

Advantages/disadvantages

There are a few different types of short-term business loans, all of which we’ll go over in a bit. But regardless of the short-term loan option you choose, they have a few crucial things in common both in terms of their advantages and disadvantages.

The main advantage of short-term loans is that they’re generally quick to access. This is crucial for entrepreneurs looking for smaller amounts of funding to help them address immediate business needs—you don’t want to be waiting around if you’re in a cash flow crunch, of course. Additionally, small business owners with less or weaker credit history may still qualify for these loans, especially through alternative lenders (explained below). Finally, there generally aren’t a ton of restrictions on how you can use capital from a short-term loan, which can be highly beneficial to small business owners in different situations.

If you’re looking for a large loan amount, you may find that one of the disadvantages of these types of loans is that you can’t often borrow a substantial amount of working capital for the short-term (by nature, these loans simply don’t accommodate that). Additionally, you may need to take on more frequent payments to lenders—sometimes weekly or daily—depending on the type of of short-term financing you opt for.

Qualifying for a Short-Term Loan

Unlike their medium- and longer-term counterparts, short-term business loans are often more accessible to business owners without substantial time in business and annual revenue. Additionally, they’re easier to access if you don’t have spotless credit (and, if you repay in full and on time, you can build your credit score with a short-term loan—a win-win.)

Minimum qualifications

  • At least $50,000 annual revenue
  • 580-600 minimum personal credit score
  • More than six months in business

Depending on the lender with whom you work, the type of short-term loan you’re pursuing, and the details of your own business, including things like the industry in which you operate, you may be subject to slightly different requirements. These are an average to use as a guideline.

How do short-term business loans work?

Short-term business loans are types of small business financing that are meant to be paid back within 18 months. Some short-term financing can be as brief as three months. Loan terms are either set by your lender or, in specific cases, such as invoice financing and merchant case advances, are determined when you can repay the capital (though note that the longer you take to pay off the loan, the more expensive the loan will be).

Some short-term loans can be a lump sum of cash deposited into your business bank account to which you have immediate access—what you may think of as a “traditional” business loans—while others enable you to access only the capital you need as you need it. This depends on the type of short-term financing you pursue. Repayment of these loans generally happens daily or weekly.

The costs that you’ll incur with short-term loans will vary depending one the type of financing you pursue. But, in general, here’s what to expect:

  • Looking across the different types of short-term loans, annual percentage rate (APR) can be as low as 8% and as high as 80% 
  • You’ll generally pay above the low end, but below the high end
  • The better your credit score, the lower your interest rate; candidates with weaker financial history may incur a high interest rate
  • Some interest will be assessed as a “factor fee,” which is the factor rate times the amount of your loan
  • Lenders will assess varying fees, contingent on whom you borrow from
  • A common fee is the “origination” fee, charged when you first gain approval for the loan
  • Repayment terms are usually three months to 18 months
  • Most commonly, repayment occurs daily in some cases, weekly in others (or, for invoice financing and merchant cash advances, as soon as you’re able to repay the balance); monthly repayment like other long-term loans is rarely an option for short-term loans due to their nature of their shortened repayment periods

Reasons to take out a short-term business loan

Because of their flexible nature, short-term business loans have a variety of uses. Here are a few common scenarios when a short-term business loan can help you:

Cash flow: Unfortunately, it’s common for some entrepreneurs to have a tight cash margin that doesn’t enable them to pay for common operating expenses, payroll, utilities, and more. Short-term business loan can help provide temporary relief to get through crunch times.

Seasonality: Some seasonal businesses need help during their low seasons when they’re not generating revenue. Short-term loans can help a company take care of off-season expenses, such as overhead.

Emergency repairs: In the case of emergencies like broken windows, flooded bathrooms, and more, business owners who don’t have a lot of liquidity can rely on short-term loans to help take care of these expenses.

Short-lead opportunities: Say you have an opportunity to purchase inventory from a closing competitor, or hire a stand-out prospect, but you don’t have the cash to support either. A short-term loan can provide the quick capital you need to take advantage of these rare opportunities.

Bridge capital: For businesses considering a larger financing push—either through investors or small business financing—short-term loans can help bridge the period between obtaining a larger sum to make sure business keeps running smoothly.

Short-term business loans are not meant to be used for large investments such as fixed assets or real estate.

Types of short-term business loans

As we mentioned, there are different loan types that can address many different small business and startup needs.

Business line of credit: A line of credit is a common type of loan that small business owners take advantage of to help with lots of different types of expenses. With lines of credit, you work with a lender to get approved to access a certain sum of capital, and can “draw” against it as you need it. A major benefit of this type of loan is that you only pay interest on what you use, and, often, the credit line is “revolving,” which means when you pay it back, you can access the full sum of capital again. These loans generally don’t require daily or weekly repayment, which is an advantage over other types of short-term loans.

Merchant cash advance: A merchant cash advance is just that—an advance, but provides the same function as a short-term loan. With this, a lender purchases a percentage of your upcoming credit card sales, which means they get a daily take of the business that you do in order to pay off the advance. In this case, your repayment period is daily, and will last as long as it takes you to repay your loan. It’s important to note that daily repayment via credit card sales can be a stress on your daily cash flow. Additionally, this loan is the most expensive type of short-term financing, but can be an option for businesses that need capital quickly and know that they consistently do high credit card sales.

Invoice financing: If you have capital tied up in unpaid invoices, invoice financing enables you to access up to 85% of that balance quickly—sometimes within a day. The repayment is due when your client pays up, and the lender will release the balance of your invoice minus some processing fees, including a fee for every day your invoice is outstanding. Sure, you’re paying a premium to access the money faster, but it can make a huge difference for entrepreneurs with cash flow issues.

Short-term loans: Although “short-term loan” is a general term for this kind of limited-period financing, the term also describes a certain type of loan: a shorter-duration term loan. This is the “traditional” type of loan we mentioned in which you receive a lump sum of capital in your business bank account upon approval, and pay back the loan over the duration of the term. These types of loans often require weekly payments.

How to apply for a short-term loan

You’ll work with a lender to apply for a short-term loan, regardless of the type of financing product that you choose. Many loan applications can be submitted online. The application process for short-term loans is generally fast and streamlined, which will enable you to get a quick decision.

Lenders will have different requirements in terms of what they consider a qualified candidate profiles as well as the documentation that they require. So, you’ll want to check with your lender on what exactly you need. Here’s what to expect out of the short-term loan application process:

Documents you need

As we mentioned, exactly what you’ll need is contingent on the type of short-term loan you’re seeking as well as the lender with whom you’re working. But it’ll help you to prepare these commonly requested documents in advance:

  • Your credit score
  • Two to three months of bank statements
  • Two years of personal and business tax returns
  • Personal identification
  • Invoice to finance (if applicable)

Some lenders may ask for your business licenses and legal documentation, such as incorporation documents and permits to operate, and financial documentation such as a profit and loss statement.

Where to find the best short-term financing option

As you search for the best short-term business loan options, you can look in a few different places. Here are the most common avenues to secure short-term business funding:

Traditional lenders

One of the first places you may look for a short-term small business loan is at a traditional lender, or bank. Traditional banks can be a great option for small business owners, as they tend to have premium rates. An important thing to keep in mind is that many people want to secure loans from banks for this reason, so they’re highly competitive. Banks are particular about the candidates they approve, and may stick to the most qualified candidates that present the lowest risk profile.

Additionally, bank loans can take quite a bit longer than those from alternative lenders. This is particularly pertinent for small business owners seeking short-term financing, since these loans are often answering the need for immediate capital.

Alternative Lenders

Alternative lenders—which you may know as online lenders—offer, well, an alternative to bank loans. There are several upsides to working with an alternative lender, and they shouldn’t be considered as a secondary to bank loans.

First, if you don’t have an iron-clad financial profile, such as a high credit score, online lenders may provide you more options for short-term loans and other business loans. The one tradeoff may come in terms of interest rate; since alternative lenders take on riskier candidates, their terms may be slightly less favorable than those from traditional lending institutions.

Still, even if you are paying a bit more with an alternative lender, they do have another unique advantage. They often work faster than traditional lenders, and also offer sophisticated apps, such as tools and dashboards, that enable you to keep track of your loan and other business financials. Finally, if you’re a startup, you may have more options to gain approval than with a bank.

BlueVine

BlueVine is an alternative lender that offers short-term business loans to a variety of businesses, including startups. With competitive terms and quick approval, BlueVine can be a strong option for many entrepreneurs looking for a business line of credit, term loan, or invoice financing. Work with a BlueVine representative to apply for a short-term loan, and you can find out your approval status in as little as one business day.