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

• You Have Poor Credit: As long as you have consistent cash flow, you will likely qualify for a short-term loan.
• You Need Money Fast: Short-term loan lenders typically only require a few documents and make fast lending decisions. It’s not unusual to be approved for a loan within 24 hours and receive your funds a day or two later.
• You Don’t Want To Deal With Loan Use Requirements: In most cases, as long as you’re using the money for business purposes, most lenders don’t care how you specifically use the funds.
• You Don’t Have Specific Collateral: Most short-term lenders require a personal guarantee and a blanket lien but don’t require specific collateral (such as equipment or real estate).

• You Can’t Afford The Rates: Short-term loan rates tend to be higher, overall, than other kinds of installment loans.
• You Can’t Handle The Repayment Schedule: Daily, or even weekly payments, can be punishing if your business’s cash flow isn’t consistent.
• The Loan You’re Considering Has Prepayment Penalties: Because the fixed fee is pre-determined, you cannot save money by repaying your loan early. That said, some lenders offer discounts if you repay before your maturity date.

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, check out our article on 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. Other options could include equipment loans or invoice financing.

Also, for some viable loan provider candidates, check out our reviews for OnDeck, Fundbox, Kabbage, BlueVine, and Fundera.

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.

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.

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.

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.

Short-term loans are sometimes called “cash flow loans” because short-term lenders are typically more interested in your daily cash flow than in your credit score or your business profitability. As such, these loans are generally suited to businesses that have strong, consistent daily cash flow, such as retail stores, restaurants, and some service businesses. If your business has inconsistent or poor cash flow, chances are you are not a good candidate for a short-term loan.

Your Business Bank Account

Short-term loans will typically require a business bank account for both deposits and payments. As such, your lender will likely want to evaluate the inflows and outflows of cash into your account. Get a decent sense of the rhythms of your account before you apply.

Don’t have a business bank account yet? We can help! Check out our article on how to open a business bank account.

3 Months Of Bank Statements

It’s not unusual for your lender to ask for a certain months’ worth of bank statements to evaluate your cash flow. This number will be three months in many cases, but be prepared to offer up to a year’s worth.

Your application will go faster and more smoothly if you have the necessary information handy in advance. This includes things such as personal identification, three to six months of bank records, and corroborating documents to show that you are, in fact, the owner of your business.

Your Business Tax ID Number

If you have an EIN, you’ll probably be able to speed up your application by making it easier for the lender to verify your identity. Note that many lenders will not explicitly require that borrowers have an EIN.

You may be looking at short-term loans in part because you don’t have great credit, so you may be surprised to see this on this list. While your credit score matters less for short-term loans, you’ll still get better responses and terms the higher your credit score is. So long as your credit score is over 500, you should qualify for something, however.

Your Personal Credit Score

Since many alternative loans require a personal guarantee, many will also check your personal credit score, typically through one of the three major credit bureaus.

Your Business Credit Profile

Though less common for short-term loans, some online lenders will check your business credit profile rather than or in addition to your personal credit. When it comes to your business, short-term lenders are usually more concerned with its cash flow.

This is another area where short-term loans tend to be lenient. While many bank loans will want you to have been in business for over three years, you can qualify for a short-term loan within a few months.

Your Time In Business

Lenders want to see that you can keep the lights in your business for a least a few months before they extend you credit. Most short-term lenders are willing to work with businesses that have been around for six months. Some will work with businesses that only have been around for three months. Rare is the lender willing to make a business loan to a brand new business.

Your Annual Revenue

Servicing short-term loans can be expensive and disruptive, so lenders will want to see that your company takes in a minimum amount of revenue each year. Note that some lenders will look at average monthly revenue rather than annual.

Most lenders don’t want to be in line behind a lot of other lenders to collect on their debt should a borrower default. Not only that, but lenders will generally consider your debt-to-income ratio when evaluating your application. The lower the number, the less of a risk you’ll look like as a borrower.

A short-term business loan is an installment loan with a term length of fewer than 18 months. Short-term business loans usually have flat fees rather than traditional interest rates and are often repaid daily or weekly rather than monthly.

Short-term financing can include short-term loans, merchant cash advances, and some forms of lines of credit.

The best short-term loan will depend on your business needs. A short-term loan may be a good choice if you need a quick cash infusion and have less than great credit. For borrowers with better credit, a line of credit may be a better option.

Short-term loans are offered by companies such as PayPal’s Loanbuilder or through aggregators such as Lendio.

Short-term loans tend to be the easiest type of loan to qualify for, although there are non-loan products that can be easier to qualify for than short-term loans.