What Is A Short-Term Business Loan & Does My Business Need One?

For many small business owners, short-term business loans can be a fast and easy way to access extra capital.

New to business loans and need quick funding? In this post, we’ll discuss short-term loans, whether your business is a good candidate, and how to find the best short-term loans for small businesses.

What Is A Short-Term Business Loan?

Short-term business loans are similar to traditional installment loans in that you can receive a lump sum of cash from a lender. However, there are several key differences.

Term Lengths Of Short-Term Business Loans

As the name suggests, short-term business loans generally have shorter term lengths than other installment loans. Many long-term loans are repaid within one year, with some lenders offering terms up to two years.

Interest Rates Of Short-Term Business Loans

Short-term business loans do not have interest rates like traditional installment loans. Instead, short-term loans have flat fees (also known as factor rates), which are presented as a percentage or multiplier.

Unlike interest, this fee is only calculated once so you’ll know exactly how much you’ll be repaying before you accept a loan offer. Factor rates can range anywhere from 1.09-1.6 (or 9%-60%) of the borrowing amount.

For example, you borrow $10,000 and your factor rate/flat fee is 1.35. You will have a fixed fee of $3,500 for a repayment total of $13,500. This fee could also be expressed to you as 35%.

Additional Fees

Some lenders may require other small business loan fees in addition to the factor rate, like origination or closing fees.

Repayment Terms Of Short-Term Business Loans

Short-term loans generally aren’t repaid every month; most lenders require repayment every business day or every week. These payments are typically automatically deducted from your business checking account by an ACH payment and are fixed unlike a merchant cash advance.

There are exceptions to just about every rule, so keep an eye out for lenders like Square Capital that have fluctuating payments.

Is A Short-Term Loan Right For Your Business?

Short-term business loans can be useful for many small business owners, but they do have some characteristics that might make them unsuited to particular businesses.

When A Short-Term Business Loan Is The Right Choice

When A Short-Term Business Loan Is The Wrong Choice

Potential Short-Term Business Loan Risks

While short-term business loans are quick and easy, there are some risks to keep in mind. Here are the potential pitfalls of short-term loans.

Expensive Rates

While you may be prepared to pay a premium for a short-term loan, that doesn’t mean you should accept just any rate. Be wary of any factor rate or flat fee that reaches 1.20 or 20%. Steer clear of a 1.40 (40%) unless it’s an emergency.

Prepayment Penalties

Short-term loans frontload all of the interest that would, in other products, accumulate over time. This model works fine if you’re paying your loan off on the prescribed schedule. If you pay it off ahead of schedule, however, you’re paying for money you didn’t use.

You don’t want to be penalized if you finish paying off your loan early. Choose a short-term lender that offers discounts for early repayment.

Fixed Payments

Short-term loans usually have fixed daily or weekly payments that don’t fluctuate with your revenue. This can cause problems if you experience a sudden downturn in revenue.

Try to work with lenders who will work with you if your business encounters hard times before you repay.

Double Dipping

Some short-term lenders employ a practice known as double dipping. This is a problem when a borrower renews or refinances a loan with a fixed fee.

Because the full fee technically has to be repaid even if the loan is paid early, borrowers who refinance or renew a loan are essentially paying interest on interest. If you choose a loan provider who participates in double dipping, you could be losing a lot more money than you would if you had chosen a provider who doesn’t use this practice.

If you think there’s a possibility that you’ll renew or refinance your loan down the line, it’s important to find a lender that does not participate in double dipping.

How To Qualify For Short-Term Business Loans

Lenders tend to differ on the exact qualifications they’re looking for, but there are some general things you can do to maximize the chances of your short-term business loan application being approved.

Where Can You Get Short-Term Financing?

Now that you have a sense of whether or not a short-term business loan is right for you, you’re probably wondering where you can get one. Short-term loans have been around long enough now that they’re no longer a niche product, so you have a few options.

• Online Lenders: Many online lenders offer short-term loans with an eye toward businesses with sub-optimal credit. Do your due diligence, however, because some online lenders can be sketchy at best and dishonest at worst. We’ve done some work for you already, feel free to start your research with our article about some of our favorite lenders.
• Traditional Banks: Brick-and-mortar banks are generally known more for mortgage, car, and commercial loans than short-term loans. Some banks have begun offering their own versions of short-term loans to compete with online lenders. Short-term business loans from a bank are going to have better rates than online lenders, but their applications are going to be much more involved, and their standards for lending are much higher.
• Merchant Services/Payment Platforms: Card processors like PayPal, Square, and Stripe all offer their customers short-term loans. They’re different than typical short-term loans because they don’t usually have definitive term lengths or fixed payments. Instead, your payment processor will collect a percentage of your daily sales and pass that through their system until your loan has been paid off. This is very similar to a merchant cash advance, and there’s a lot of overlap between the two, but these services are still classified as loans, not advances.

Alternatives To Short-Term Loans

Short-term business loans are just one of many options for merchants who need a cash infusion. If short-term loans sound too risky, too fast, or too rigid for your business, you’ll want to find a type of financing that more closely fits your business’s circumstances.

For a detailed look at all your options, explore small business loan types, or browse our picks for the best same-day business loans and merchant cash advances. If traditional loan methods don’t quite work for you, you can always explore options like microloans or crowdfunding.

No matter which option you choose, make sure to do your research, compare your options, and find the best loan for your situation.