This article was reviewed and updated on July 29, 2020
As a small business owner, there are several reasons to consider applying for a business loan. Maybe you’re trying to get your business off the ground or take it to the next level. Or it could be that you’re trying to solve some short-term cash flow problems. Short-term business loans are a potential option for meeting short-term cash flow challenges and meeting other needs that don’t require longer-term financing options.
Depending on the business need you’re trying to fill, a long-term loan might not be the best answer. For example, borrowing to take advantage of a steep discount on quick-turnaround inventory is very different from borrowing to purchase a new warehouse. It may be an oversimplification, but most people wouldn’t use a 30-year loan to buy a new car. The accrued interest would make the total cost of the car too expensive. Instead, it may be worth considering short-term business loans to solve your problem. Here’s what you need to know about short-term business loans, what’s available, and where to look to get solid options.
What is a short-term business loan?
A short-term business loan, sometimes called a working capital loan, is designed to provide small business owners with quick access to the working capital they need to address short-term financial issues. Like any other term loan, you’ll get the loan funds in a lump-sum payment, then pay it off over the term of the loan. Short-term loans include any loan with a term that could be from 3 months to 3 years.
In some cases, however, you may get access to a revolving line of credit in the form of a credit line. Most modern lines of credit also come with a defined term, but unlike a term loan, you can access your line of credit when you need it, repay what you’ve accessed, and use it again over the term of the credit line. What’s more, you only pay interest on the amount of credit you use.
If your business is experiencing a cash flow crunch or has an opportunity to take advantage of an offer that will generate more profits, short-term businesses can help in both situations. In addition to the fact that 82% of U.S.-based small businesses fail because of cash flow management issues the opportunity costs lost by being undercapitalized can’t be ignored either. Looking at short-term financing as solely bail-out financing would be shortchanging what a business can do with quick access to a short-term loan.
Is a short-term loan right for my business?
The short answer is probably yes, but it will depend on the reason you’re borrowing. Most of the time short-term loans will have a higher periodic payment than a longer-term loan, but they will likely have less accrued interest—potentially making the total dollar cost of the loan much less. Additionally, for loan terms under a year, APR isn’t the best way to express the costs because of the way APR is calculated, the costs may even appear to be greater than they really are.
For example, if you borrow $10,000 over six months at an APR of 67.5%, you will pay a total of $1,500 in interest cost. Borrowing the same $10,000 at 22.5% over four years you’ll pay a total of $4,800 in total interest costs. Depending on the use case, even at 67.5%, the shorter-term loan could be the right choice. This is particularly true for loan purposes with a defined ROI, like purchasing inventory.
Sometimes these short-term loans are called an unsecured business loan because they don’t require specific collateral to used to secure the loan. Technically speaking, this is a misnomer, because a truly unsecured business loan today is extremely rare and only available to a financial institutions biggest and more creditworthy clients. Although these loans aren’t typically secured with specific collateral, they are secured with a general lien on business assets and a personal guarantee.
This is good for businesses because it makes it possible for a business without assets that would be considered collateral to access borrowed capital. If you apply for a short-term business loan, you should expect this as well as the need to sign a personal guarantee.
What are the most common reasons for a short-term loan?
There are a number of reasons why a small business would choose a short-term business loan. As a genera rule, think in terms of the need. A short-term loan is often the best way to address a short-term financial need. Here are a few use cases where a short-term loan could be a good fit:
- Project start-up costs: Ramping up a new project often requires some upfront cost that might be more than what you have available in cash flow, but can be recouped in 60 or 90 days. In that case, the ability to get in and out of a short-term loan quickly at a lower total dollar cost could make more sense than a longer-term loan of several years or more.
- Bridging a seasonal cash flow gap: Seasonal businesses sometimes need to borrow to meet cash flow demands in-between their busy seasons. A short-term loan could provide the cash flow needed to bridge the seasons (provided there is enough cash flow to make the periodic payments).
- Purchasing quick-turnaround inventory at a discount: It’s not uncommon for suppliers to occasionally offer steep discounts on merchandise you regularly sell—provided you can purchase a larger-than-normal quantity and respond quickly. A short-term loan could be a good fit for such times since these lenders can typically respond to your loan request quickly and make capital available within a day or two.
- Cover the costs of emergency repairs of critical business equipment: When equipment necessary to the operation of your business fails, you can’t afford not to access cash as quickly as you can to make repairs or replace the equipment. A short-term loan can make that capital available quickly.
Types of short-term business loans
Whether you’re a brand-new startup or an established business, there are a few different short-term business loans from which you can choose. Each comes with its own features and terms, as well as benefits and drawbacks. Here’s what to know about each.
These loans are similar to traditional bank loans, but with a shorter repayment term. In general, you’ll have a hard time finding term loans with short repayment periods from traditional small business lenders. Instead, you’ll likely need to work with an online lender to get what you need.
Depending on the lender and your credit situation, interest rates on these loans can range from 8% all the way up to 99%. If you only qualify for loans on the high end of that spectrum, it may be worth comparing it with some of the other short-term business loans available or checking to see if there’s another way to solve your cash-flow problems.
Lines of credit
Most business lines of credit offer long repayment terms. But some online lenders offer short-term credit lines if you prefer that setup over a term loan.
Business line of credit interest rates can range from 8% to 80%, with short-term loans likely on the higher end of that spectrum.
Also called supplier credit, this type of short-term loan is an excellent way to get a handle on your cash flow. It involves working with one or more of your vendors to create a credit arrangement, where you get some time — typically 30, 45 or 60 days — to pay for a product or service they provide instead of cash on delivery.
With this setup, you typically don’t have to pay interest as long as you pay what you owe by the due date. If you do, the interest rate is typically low. You may, however, qualify for a discount if you pay early.
Vendor credit is an excellent short-term business loan option because it gives you time to convert those costs into sales to your own clients or customers.
While not a traditional creditor-borrower relationship, some vendors may be willing to report your on-time payments to the commercial credit bureaus, which can help you establish and build your business credit history.
Invoice financing is a specialized short-term small business loan that’s considered a cash flow loan instead of a term loan.
You can apply for invoice financing if you’ve sent a client or customer an invoice but haven’t received payment. The lender will require the invoice to be used as collateral to secure the loan. You’ll then repay the debt plus interest and fees when you receive payment from your client or customer.
The amount of interest you’ll pay with invoice financing depends on the lender, the invoice and your creditworthiness. But you can generally expect to pay an interest rate between 13% and 60%.
Invoice factoring is a similar term you may come across when you research invoice financing — however, the two are not the same. While invoice financing involves borrowing money with an invoice as collateral, invoice factoring doesn’t involve a credit relationship at all.
With invoice factoring, you sell the invoice to a third-party company in exchange for upfront payment — typically 70% to 90% of the invoice amount. The new company now owns the rights to the payment and will work with your client or customer to get payment.
Invoice factoring doesn’t involve any interest or fees, but it may end up costing you more with the discount the seller takes.
Merchant cash advances
A merchant cash advance is another type of cash flow loan, with repayment terms based on your credit and debit card sales instead of a set time period.
As the name suggests, a merchant cash advance is an advance on your future credit and debit card sales. This means that you likely won’t qualify unless that revenue source is strong.
If you do, however, you’ll get the loan funds upfront then pay back the lender with a percentage of your future sales.
Merchant cash advances are easy to qualify for because they’re secured by your cash flow. However, they’re one of the most expensive forms of business financing. Depending on the situation, interest rates can range from 20% to 250%.
As a result, merchant cash advances should typically be considered as a last resort, and only if you know you can repay the debt quickly.
Business credit cards
While it’s possible to carry a balance on a business credit card indefinitely, they’re typically considered a short-term business loan because you can use your card and pay off the balance in full every month.
Business credit card interest rates can run upwards of 20%, but you typically won’t see many charging 30% or more, and many offer interest rates in the mid-teens. What’s more, some business credit cards offer introductory 0% APR promotions, which can allow you to regulate your cash flow situation and get up to a year or more to pay off your debt interest-free.
In addition to that kind of perk, you may also get a card that offers rewards on everyday purchases you make and several other valuable perks.
Whether or not you get another type of short-term business loan, it may be worth having a small business credit card to get value back on your regular expenses.
Requirements to qualify for a short-term business loan
Because short-term loans come in different shapes and sizes, every lender will likely have their own qualification criteria, but as a general rule, those requirements are less stringent than a traditional term loan at the bank. Many online lenders offering short-term financing today, for example, want to see at least a year in business, annual revenues of $100,000, and cash flow that will support daily or weekly periodic payments. The personal credit score requirement is also much less strict. Some short-term lenders will approve a loan application if the business owner has a personal score of at least 550—substantially less than what would be approved at the local bank.
When applying for a short-term business loan, you should expect to be asked to show the following:
- Your business tax ID number
- Your personal credit score
- Your business credit profile
- Your business bank account
- 3 months of bank statements
- Your annual revenues
- You time in business
Some lenders might ask for more and there may be lenders that will require less, but most will want to see this information to process your loan application.
Popular short-term financing companies
If you’re seriously considering getting a short-term business loan, your best bet is to go with an online lender. Here are five companies to consider.
Fundbox lines of credit and invoice financing
Fundbox offers a business line of credit and invoice financing, giving you the option to choose which is better for you. With the line of credit, you can borrow between $1,000 and $100,000, which you can repay over a term of up to 12 weeks.
The interest rate on the loan can vary from 10.1% to 68.7% and is based on your creditworthiness and terms of the loan.
To qualify for a Fundbox line of credit, you’ll need to have been in business for at least three months, plus have at least $25,000 in annual revenue. There’s no minimum credit score, however, so it could be a good fit if you have bad credit.
If invoice financing is a better fit, you can qualify for 100% of the invoices used to secure the loan with Fundbox, although there is a minimum of $1,000 and a maximum of $100,000. As with a Fundbox line of credit, you’ll have up to 12 weeks to repay the debt, with interest rates ranging from 13.44% to 67.70% APR.
In addition to having invoices as collateral, you’ll need to have been in business for at least three months, and have accounting software data for at least that same amount of time that the lender can review.
OnDeck business loans
If you prefer a term loan over other short-term business loan options, OnDeck is worth considering. OnDeck offers loan amounts ranging from $5,000 to $500,000, which you can pay back over a term of three to 36 months.
The annual interest rate (AIR) on the loan, which doesn’t include the lender’s origination fee, can be as low as 9.99% for highly-qualified borrowers, but averages 48.7%. The origination fee varies based on if this is your second or third OnDeck (a benefit for being a repeat customer). For the first loan, it’s 2.5% to 4%, then 1.25% to 3% for your second, and 0% to 3% after that.
OnDeck has a minimum credit score of 550, making it a solid choice for business owners with less-than-perfect credit. However, you’ll need to have at least $100,000 in annual revenue and be in business for a year or longer to qualify. You’ll also need to prove that you have a stable checking account balance with frequent transactions.
Like many lenders, including some traditional lenders, periodic payments will be either daily or weekly, depending on the loan and your credit profile, and will automatically debited from your business checking account via an ACH transfer.
Kabbage lines of credit
Kabbage is another lender that offers a short-term business line of credit. You can borrow between $2,000 to $250,000, and pay it back over six or 12 months. Instead of charging an interest rate, Kabbage has a monthly fee, which can range from 1.5% to 10%.
Depending on what you qualify for, this fee can result in an APR as high as 90%, making it one of the more expensive options.
If you’re considering a Kabbage line of credit, you’ll need to be in business for at least one year to qualify. As for financials, you’ll need at least $50,000 in annual revenue or a minimum of $4,200 per month over the last three months.
LendingClub business loans
LendingClub doesn’t provide loan funds on its own, rather it matches small business owners with individual investors who provide the capital you need.
You can borrow between $5,000 and $300,000, and repayment terms range from one to five years.
The lender’s APRs range from 9.77% to 35.98%, depending on your creditworthiness and the loan terms, and that rate includes the LendingClub’s origination fee of 1.99% to 8.99%. To get a loan, you’ll need to have a credit score of at least 600 and no bankruptcies or tax liens on your credit report.
You’ll also need to have been in business for a year or more, plus at least $50,000 in annual revenue.
Frequently asked questions
As you research short-term business loans, you may come up with other questions about the process and what’s available. Here are some common questions we found from business owners like you, along with their answers.
Can I get short-term business loans with bad credit?
Yes, it is possible to qualify for a short-term business loan with bad credit. In fact, some of the lenders we’ve covered above will work with you despite having a less-than-perfect credit score.
That said, it’s important to keep in mind that having bad credit could mean paying higher interest rates and fees. So if you have time to build your credit or cheaper alternatives are available, consider those first.
What is a short-term business loan calculator?
Several small business websites offer loan calculators that can help you determine how much a business loan is going to cost you, based on the interest rate, associated fees and repayment terms. It’s worth using one of these calculators before you apply for a short-term business loan so to make sure you can afford it.
What about short-term loans for a startup business?
Most business loans require you to have at least some time in business to qualify. Lenders like Fundbox don’t have a high standard for that, but many do. As you’re starting out, it may be worth considering a business credit card or a personal loan, both of which don’t require any time in business at all.
How to score a low interest rate on a short-term business loan
If you need short-term financing now, the best thing you can do to get a low interest rate is to build and maintain a good to excellent personal credit score and business credit profile. To find the best interest rates possible for your situation, you’ll need to shop around and compare multiple loan options and lenders. While the rate may still be relatively high compared with other business loan types, you could save money by eliminating more expensive options during your research phase.
Working on your credit profile before you need financing will help you be prepared for those times when you do need to access borrowed capital. Make sure you’re current on payments with all of your accounts, consider paying down your credit card balances, and address any other potential concerns on your business and personal credit reports.
Improving your credit can take time, but even incremental increases with your credit score can make a difference with your interest rate.