The Business Owner’s Guide To Getting A Short-Term Loan
Whether it’s to pay for an unforeseen expense, a critical upgrade, or even a time-limited opportunity, there’s a decent chance that sometime over the course of your proprietorship, you’ll need money you don’t have, and you’ll need it fast.
The good news is that there are legions of would-be financiers more than ready to hand you a wad of cash, often within a matter of days or even hours. On the other hand, that eagerness should give you pause. While there are a lot of reputable actors in the short-term loan business, the industry is also somewhat notorious for predatory lending practices. In the interest of arming you with the knowledge necessary to get the most out of short-term lending, we present the following guide.
Table of Contents
What is a Short-Term Loan?
Because bank-based lines of credit have become increasingly difficult to qualify for, short-term loans have emerged as a popular alternative for cash-strapped businesses.
Though what qualifies as a “short-term” loan will differ depending on who you ask, these loans are typically repaid within a year. Such a brief duration means the loan won’t have much time to accumulate interest. Funders work around this by charging flat fees or high interest rates.
Short-term loans may be secured or unsecured. A secured loan requires you to put up an asset as collateral, meaning the funder will place a lien on the item until the loan is repaid. Some lenders will issue blanket liens, which allow them to seize any business assets necessary to recover their loss. Secured loans generally allow for better rates and access to higher amounts of capital.
Many short-term financial products are now unsecured, however. Unsecured loans, rather than relying on collateral, use your income as a basis for repayment. These are inherently more risky for the lender–recouping losses will require a court judgment. Nevertheless, there are ways lenders work around this issue. For example, many will lock you into weekly or daily payments that are automatically debited from your account. Others will have you sign an agreement that waives your right to a defense in civil court should you default on your payments.
What About Merchant Cash Advances?
If you’re looking for short-term loans, chances are you’ll run across funders offering merchant cash advances (MCAs). Though there is a lot of overlap between short-term loans and MCAs these days, MCAs traditionally differ from short-term loans in a few key ways. Most importantly, MCAs are typically subject to less stringent state laws, which has a tendency to make them both more expensive and easier to qualify for than short-term loans.
If you’d like to learn more about MCAs, check out some of our merchant cash advance resources.
Who Provides Short-Term Loans?
If a short-term loan is starting to sound like a good idea then the next step is to look at different lending entities. As a general rule, though, the terms of the loan are more important than who is offering it.
Even if they’re shy about credit these days, many traditional banks offer short-term loans, particularly to customers with whom they have an established relationship.
Restrictions that once greatly limited the kinds of financial products credit unions could offer their members have been relaxed over the last decade or two. If you or your business belong to a credit union, it’s worth asking what kinds of short-term financial solutions they can provide.
Online funders–the “new” kids in town–are non-bank entities which (you guessed it) conduct most of their business via the internet. Who they actually are can vary. Some are entirely in-house lending entities. Many represent networks of bank and non-bank lenders. These loans tend to be characterized by extremely high-interest rates, although numerous online funders are willing and able to cut you a square deal (a relatively square deal, that is–we’re still talking short-term loans here).
Funders like this usually have a streamlined application process that you can begin online. Just be aware that finalizing the deal will require you to provide at least some documents (bank statements, your EIN number, etc.).
Finding the Best Deal
Truth be told, it isn’t that difficult to get someone to offer you a short-term loan these days. If you have a healthy and somewhat regular monthly revenue stream and a credit rating that clears 550, there’s probably someone out there willing to offer you money. More than one someone, in all likelihood.
Unfortunately, the way the terms of these loans are presented can make them difficult to compare. Some companies describe their loans in terms of factor rates; others use interest rates. Others won’t give you a rate at all and simply present you with a flat fee. Even comparing final costs hides a critical consideration: the term length.
Luckily, this can all be expressed as a simple number: the APR.
You’re probably used to seeing APRs in the fine print of your credit card statements, or in long-term loans and mortgages. Simply put, an APR is a percentage representing the overall cost of borrowing including, but not limited to, interest rates.
Your lender likely won’t provide this number to you, but you can calculate it on your own once you have an offer. If the number is in the triple digits–and it very well may be–run away screaming.
Ideally, you’ll want to have several offers to compare; just be aware that most of these companies will do at least a soft pull on your credit.
You can also use external resources (like our site) to obtain general information about funders.
One final factor to consider is how frequently you’ll be making payments. This is mostly a matter of preference, but you’ll need to think differently about your finances depending on whether your payments are daily, weekly, or monthly.
Preparing for the Next Crisis
If this is your first time seeking a short-term loan, you might be wishing that’d you’d made some contingency plans. You no doubt have your hands full at the moment, but now is a great time to get out ahead of the next crisis.
If you’re not able to establish a line of credit, the next best option is to ask your current short-term loan provider if they offer any incentives to repeat customers. In many cases, they’re willing to extend repeat clients better rates and larger sums of money. Some will even offer line of credit-like deals where you’ll be pre-approved for future capital. Further, the existence of such policies is often a sign that the funder is interested in cultivating a positive relationship with customers rather than simply fleecing them.
Remember that most businesses face unexpected costs at some point; what you’re going through is absolutely normal. Hopefully, we’ve put you on track to understanding how short-term loans works and how to go about getting them. And be sure to check out our reviews of the short-term lenders you may be considering. Good luck!