Everything You Need to Know About Short-Term Business Loans

Everything You Need to Know About Short-Term Business Loans

Everything You Need to Know About Short-Term Business Loans

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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.

If the latter is the case, you may not want to commit to a long-term financial relationship with a lender. 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, the types available, and where to look to get solid options.

What is a short-term business loan?

Short-term business loans are designed to provide small business owners with quick access to working capital to address short-term financial issues. As with a traditional business loan, you’ll typically get the loan funds in a lump-sum payment, then pay it off within one to two years. 

In addition to the original loan funds, you’ll also pay back any interest or fees the lender charges. 

In some cases, however, you may get access to a revolving line of credit in the form of a credit card or credit line. Depending on the account, you may have to pay back the full amount within a year or so, or you may be able to use the credit line over and over again, paying it back as you go. 

If your business is struggling with cash flow, short-term businesses can help stave off a more dire situation. In fact, 82% of U.S.-based small businesses fail because of cash flow management issues. 

Before cash flow becomes a serious issue for your business, it’s important to consider whether a short-term business loan can help you get out in front of things and avoid bigger problems down the road.

On the flip side, it’s important to understand that a short-term loan isn’t going to solve all of your problems. In addition to getting financing, it’s essential to take a look at how you manage your business’ finances, and whether you need to make any changes to your business plan to prevent your company from folding. 

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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.

Term loans

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. 

Vendor credit

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

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. 

Popular short-term business loan 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. The lender offers loans 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%, but averages 48.7%. The origination fee varies based on how many loans you’ve gotten from OnDeck. 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 500, making it a solid choice for business owners with bad 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.

While an OnDeck loan is a term loan, it’s important to keep in mind that you’ll need to make payments on a daily or weekly basis, which the lender will automatically deduct from your business checking account.

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 sky-high interest rates. 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 term. 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 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.

If your situation isn’t pressing, take some time to improve your personal and business credit scores. 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.

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This article was originally written on July 29, 2019 and updated on June 25, 2020.

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Ben Luthi

Ben Luthi

Ben Luthi is a personal finance and travel writer who loves helping consumers and business owners make better financial decisions. His work has appeared in several publications and websites, including U.S. News & World Report, USA Today, Marketwatch, Yahoo! Finance, and more.

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