Guide to Short-Term Small Business Loans
More and more people are starting or working for small businesses. These days, with the wealth of technology and outsourcing options available, it’s easier than ever to start and operate a small business. Yet finding funding for your small business can remain a major challenge. Typically, loans and other forms of credit are used to pay for business expenses, purchases, growth, expansion, and even everyday things like payroll. Loans for businesses typically come in two flavors – either short term or longer term.
In this guide, we’ll explain the differences between short and long-term loans (hint: it’s more than just their term and name). We’ll also look at how short-term small business loans can help and be ideally deployed by small businesses. Further, we’ll look at some of the different types of short-term business financing options available, because loans aren’t the only choice. And, we’ll provide some information on one of our best-reviewed sources of small business funding, to help point small business owners in the right direction for their funding needs.
Short-Term vs. Long-Term Small Business Loans
Traditionally, many businesses have relied on long-term loans for their working capital and financing needs. These kinds of loans offer money up front, with a structured repayment over time. That time period is usually 2 years or more, often with installment payments along the way, or a monthly repayment amount. These can be very useful for larger purchases and projects. However, as the pace of business increases, and the barriers to lending on longer-term loans are becoming higher, many small business owners are turning to short-term small business loans as a viable option for small business funding.
Short-term business loans offer several advantages over their longer term brethren. This is especially true in the case of unsecured short-term small business loan products. A short term business loan is designed to provide quick access to capital, that is then repaid fairly quickly. Most short term small business loans have a loan term of between 3 months and 1 year, and maybe stretch to 18 months at the absolute high-end. They are meant to provide immediate funding to handle unexpected bills, cash flow issues, or for small business owners to exploit emergent opportunities for growth and expansion.
This is in stark contrast to traditional, longer-term loans. They may range from 2 years to 5 or 10 years, and even longer in some cases. Typically, long-term loans are meant for ongoing or revolving working capital needs. They may also be used for a massive expansion or growth plan that requires consistent funding over time. Usually, they’re not ideal for a one-off expense or short-term projects.
Long-term funding is ideal for some businesses, such as those that have a defined budget, spending plan, or growth plan over several years. But short-term funding still has a role to play, even for these businesses. It can greatly help them to handle the kinds of short-term capital and income fluctuations mentioned above. A combination or mix of both kinds of loan options is what many small businesses find to be the best choice for their funding needs.
How Short-Term Loans Work
A short-term small business loan works in a similar manner to any other loan, just over a short time period instead of a long one. In practical terms, this also means there are differences in the area of application, approval, speed of funding, lending requirements, and so on. Because of the urgent nature of a short-term small business loan, many non-bank lenders offer very quick approvals and funding processes in most cases. This runs in contrast to traditional long-term loans, which can take quite awhile to apply for and be approved for, with significant paperwork and vetting.
Naturally, because of the higher-risk nature of these kinds of short-term loans, the requirements are a bit higher than some other types of unsecured small business funding options. Most lenders look at credit scores, the length of time you’ve been in business, and monthly business revenue as criteria for qualification and approval. The exact credit score and other requirements will vary from lender to lender.
Funding and Repayment
After you are approved for the loan, you get the full loan amount you requested as cash in your bank account. Just like any loan, it’s provided as a lump-sum up front. You can then spend it for your plans and needs as you see fit. There are no restrictions on how the loan funds can be used in most cases. Business owners have the discretion to manage their finances to the best of their abilities.
Typically, short-term business funding requires repayment within 3 months to 1 year, in installments and at a frequency as specified in the loan agreement. These options are fairly flexible at the time of your loan request, so you can choose a loan repayment schedule that makes the most sense for your business. Short-term business loans often have a medium level interest rate – not particularly low, like a secured loan, but not as high as some other forms of unsecured loan products, either. Secured loans are those backed by collateral. The risk is lower for the lender, and therefore the interest rates can be more favorable for borrowers. Unsecured loans, on the other hand, have no collateral requirements. They’ve beneficial for business owners, and present lower risk, but more risk for the lender. Hence, the interest rates tend to be a bit higher.
The Benefits of Using Short-Term Funding for Small Businesses
Short-term funding for small businesses can be amazingly useful. Not everyone can plan for expenses over the long-term, of course. Many businesses are far more seasonal and cyclical in their income and sales picture. Business often requires taking some risks in order to succeed, and in order to take those risks, you often need funding available quickly. Short-term funding, with fast approvals, can enable small businesses to meet the challenges of today and plan for tomorrow.
Some of the benefits and uses of short-term small business loans include:
- Paying for emergency or unexpected business needs, such as repairs on a piece of equipment, up-staffing to handle a large order, buying new software or technology products, and so on.
- Building a business’ credit score, so that the short-term small business loan serves as a bridge to other small business funding options later on. Successfully taking out a short-term small business loan, and paying it back on time, can really help build a good to excellent credit score for small businesses. This all means better funding opportunities later on, at lower interest rates, with greater borrowing limits.
- Capitalizing on new business opportunities, new products, new customers, and new ventures, expansion, and growth. All of these things require capital – often at a moment’s notice. Perhaps a new piece of equipment you need came on the market at a discount, but it only is available for a few weeks before prices go back up. Or perhaps a competitor had a supply chain issue, and a retailer has given you the chance to pick up the slack. Maybe you just need more staff to handle higher-than-expected demand on a new product line. Whatever the case may be, a short-term business loan can be exactly what you need to succeed.
- Managing cash flow is a lot easier with a short-term small business loan. While many kinds of small business loans can be useful for cash flow purposes, seasonality, a business downturn, or highly cyclical businesses can benefit from a loan to help smooth out the peaks and valleys between revenue and expenses throughout the year.
The Different Types of Short-Term Small Business Loans and Funding
There are several different types of short-term business loans and loan products available on the market today, especially from non-bank lenders. Each has a different purpose, and may be more or less appealing to a given small business depending on their needs, credit situation, and so on. In general, though, the three most popular short-term small business financing options include:
Loan amounts can vary, as can the repayment terms and interest rates. By definition, they usually have a loan term of a year or less for repayment. They are structured like a traditional loan, with an up-front cash lump sum for the borrower, and periodic repayments of principal and interest to the lender over the term of the loan. Depending on the particulars of the loan, repayment may be daily, weekly, monthly, or quarterly.
Business Line of Credit
A business line of credit can be available on a revolving basis. It’s not a loan per se, but can be very beneficial for short-term needs. Essentially, you are approved for a certain credit amount or limit. Then, you can borrow and draw against that amount as needed. You repay the outstanding amount over time. And, you can borrow again against the available total. This is ideal for cash flow management, and may be more beneficial for some businesses than a straight-up short-term small business loan.
Merchant Cash Advance
A merchant cash advance can be an ideal short-term small business loan solution. Like a traditional loan, you get a lump sum of cash up front. But unlike a traditional loan, there isn’t a set repayment schedule. Rather, the loan is paid back over time as an automatic deduction percentage from your credit card/debit card sales receipts. This is ideal for cyclical or seasonal businesses, as you don’t need to make large pre-set payments when business is slow. Slow times mean slower repayment, that’s all. It’s less of a risk in the eyes of many small business owners. There’s no stress about making a payment on a calendar date with no regard for how business is going at that time.
Where to Obtain Short-Term Small Business Funding
There are several ways to go about securing funding for your small business. Banks and traditional lenders are definitely one option. However, they often have higher, stricter lending requirements for their loans. Financial regulations that govern their activities are focused on protecting their commercial bank operations and deposits. Thus, they are less likely to take risks and extend credit to new small businesses.
Non-bank lenders are often the best approach for newer small businesses to obtain short-term funding. These lenders aren’t banks, but private lending firms that focus on funding small businesses. As such, they are not bound by the same rules and regulations as commercial banks and traditional lenders. This often means they can extend credit and loans to businesses that have less-than-perfect credit scores, or limited business history.
One of our favorite sources of small business funding – both short-term and long-term varieties – is BizFly Funding. BizFly Funding is a US-based non-bank small business lender, offering a full range of financing options. They have a convenient online application, and provide approvals in just a few hours. They can provide funds to small businesses in as little as 1 business day following approval.
If your small business is in need of funding, don’t hesitate to check out BizFly Funding as your first stop. And don’t forget to tell them that LifeGuideBlog sent you!
We hope you enjoyed this article! Please feel free to comment with suggestions for new content and follow us so you’ll never miss another post.