What Is A Short-Term Business Loan & Does My Business Need One?
Short-term loans can be highly beneficial for small businesses, but they don't come cheap. Our tips will help you make an informed decision.
For many small business owners, short-term business loans can be a unique and attractive solution to some common problems.
So, what is a short-term business loan? Is your business a good candidate for one? Where can you find a good loan provider?
Read on for a crash course in short-term business loans and discover the best short-term loans for small businesses.
Table of Contents
What Is A Short-Term Business Loan?
Short-term business loans are a newer addition in the last decade to the wide catalog of business loan options.
These loans are similar to traditional installment loans, but the fees are calculated differently.
- Term Lengths: Short-term business loans generally have shorter term lengths (thus, the name) than other installment loans. These loans rarely last more than 18 months, and many last less than a year.
- Interest Rates: 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.
- Repayments: 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. (For example, assume the term for the loan we discussed above is 18 months. You would be expected to pay about $35 per business day or $173 per week.)
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.
Potential Short-Term Business Loan Risks
So you’ve decided to get a short-term business loan. What should you be on the lookout for? Here are the potential pitfalls of short-term loans. Learn the risks and act accordingly.
5 Qualifications 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.