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Running a small business during the COVID-19 pandemic is challenging because many aspects of your business, like cash flow, payroll, and other expenses are harder to manage. On top of managing business operations, you also want to make sure that you and your staff are safe and healthy. If you need support for your small business during this time, there is assistance available through the Small Business Administration's (SBA) coronavirus relief options, which include the Paycheck Protection Program (closed as of August 8), Covid-19 Economic Injury Disaster Loans, SBA Express Bridge Loans, and SBA Debt Relief. Managing a small business can be difficult and often requires the support of both short- and long-term financing. Depending on your business’s specific needs, you can choose from a number of financial products to do everything from maintaining monthly cash flow to purchasing property. But how do you know what’s right for your situation?Short-term lending refers to loans and other financial products with repayment terms that are typically less than one year. Whatever amount of money you borrow from the lender will need to be paid back in-full by the end of the specified term.In contrast, long-term business loans have terms that exceed one year and typically include higher loan amounts to fund large investments that can help your business grow over time. Regardless of whether you need short- or long-term financing, it’s important to understand the differences, and the numerous options available, so you can make wise financial decisions for your business.In this guide, we’ll focus on:
- What short-term lending is.
- The pros and cons of short-term small business loans.
- Short-term business loans vs long-term loans.
- Types of short-term loans for small businesses.
- How to apply for a short-term business loan.
- Alternatives to short-term financing.
What Are Short-Term Loans?Under the umbrella of short-term financing are a number of options to help small businesses. But what exactly constitutes a “short-term” business loan?Short-term financing, which typically means financing with repayment terms under 12 months, can vary slightly depending on the lender. Some lenders may offer short-term financial products that have 18-month terms, while others may offer products with terms that last just a few months. While the details for any type of financing ultimately depend on the lender’s requirements and borrower qualifications, typically, short-term small business loans are:
- Fast to fund.
- Easier to qualify for compared to long-term loans.
- Generally lower in total cost due to shorter terms for loans.
What Are Short-Term Business Loans Used for?Small businesses typically choose short-term financing to cover smaller or urgent purchases. Due to the shorter repayment terms, frequently high interest rates, and smaller lending amounts, a short-term loan isn't typically used for a large purchase like property or ongoing expenses. But it can be used for the following short-term lending purposes:
- Working capital: Cover short-term debts and day-to-day expenses
- Inventory purchases: Re-stock or prepare for seasonal inventory needs
- Maintaining cash flow: Keep cash available to cover daily, weekly, and monthly expenses when financial inflow is low or delayed
- Marketing: Fund short-term marketing campaigns
- Expanding or improving: Fund updates to equipment, employee bonuses, competitor acquisitions
- Unexpected costs: Cover emergency expenses without jeopardizing the business’ regular finances
Who Is Eligible for a Short-Term Loan?One of the great advantages of a short-term business loan vs. a long-term loan is that it can be much easier to qualify for short-term financing. The shorter repayment terms, lower borrowing amounts equate to less overall risk for short-term lenders. In turn, this may result in more relaxed lending requirements and faster approval times. With a few simple items like bank statements and credit history, the following types of businesses may be eligible for short-term financing:
- Business or individuals with poor credit or no credit
- Businesses that haven’t been around for very long
Typical Rates and Fees for Short-Term FinancingRates and fees vary depending on the type of financial product you choose, but typically, the annual percentage rate (APR) is higher for short-term loans vs. long-term loans. Short-term financing (other than invoice factoring and merchant cash advances) that are less than five years may carry an interest rate typically between 8% and 13% percent, but that can vary by lender and borrower qualifications. (Note: the given range is for interest rates and not annual percentage rates.)Alternative short-term financing like merchant cash advances and invoice factoring use factor rates rather than interest rates and can have APRs in the triple digits. Factoring fees are calculated as a decimal figure rather than a percentage, and are multiplied by the cash advance amount to calculate the total cost of funding. Factor rates typically range between 1.1 to 1.5 times the cash advance amount, depending on industry, business history, and revenue. In addition to the interest rate or factor rate, there may be fees associated with your short-term business loan, including:
- Application fees: Charges for processing your application and setting up an account
- Early repayment fees: Some lenders may charge fees for paying back the loan early
- Service fees: Charged in intervals to cover ongoing costs related to your account
- ACH or bank wire fees: For certain types of short-term business loans, there may be fees for transferring funds between bank lenders and borrowers
- Early termination: Some companies may charge a fee if you choose to cancel the contract early
Who Offers Short-Term Business Financing?Short-term lending is often associated with alternative lenders who offer online business loans, but banks and credit unions also offer certain types of short-term financial products. More small businesses are considering online short-term lenders because application and approvals are often finalized within a matter of days or even hours. If your business needs short-term funding quickly, you may want to compare online lenders before heading to the bank.Here’s a sampling of lenders that offer short-term loans based on the Google search query “Best short-term business loans”:All information was accurate as of 1/7/21.
Pros and Cons of Short-Term Loans Short-term lenders offer financing that can be ideal for a number of small business needs, but there may also be times where they aren’t the right choice. Before you make any final decisions on whether to choose a short-term business loan or other financial product, it’s helpful to have an accurate view of the pros and cons.
Pros of Short-Term Lending Options
Fast CapitalShort-term financing can be a great source of funding when you need cash fast, particularly for working capital or unexpected expenses. Long-term business loans can take time to move through the approval process, leaving business owners waiting for much-needed funding for days, a week, or more.With a quick and simple application process, and a greater willingness to lend to new businesses or those with poor credit, online lenders typically offer funding within a matter of days—or hours, in some cases. If you need cash immediately, a short-term business loan may be an option to consider.
Easier QualificationObtaining a small business loan is not always easy, especially if you’re trying to secure large amounts of capital over long periods of time. Extending more money with longer repayment terms requires lenders to take on more risk, meaning their qualifications for these types of loans are usually pretty stringent.That’s where a short-term business loan or short-term business line of credit can be useful. Short-term financing presents less risk to lenders and therefore may be easier to qualify for, particularly if your business is newer or you don’t have good credit built up yet. However, if your business is well-established and has good credit, that doesn’t mean you should avoid short-term financing. In fact, you may be able to secure competitive interest rates and favorable terms on a short-term bank loan because of your exceptional qualifications.
Resolve Cash Flow IssuesMany businesses experience cash flow issues, even very successful ones. If you have a business that’s based on seasonality or invoicing, it’s likely that some months may have less cash flow available to cover things like payroll or necessary repairs.With short-term financing, you can typically choose a product that serves your cash flow needs, whether it’s with a revolving line of credit or a short-term loan, so that you’re not concerned about how to make ends meet each month.
Cons of Short-Term Lending Options
Higher APRsIt’s not uncommon for short-term business loans to have much higher APRs than long-term loan options. The cost of quick, accessible financing is higher interest rates and possibly even extra fees. Despite this, keep in mind that the overall cost of a short-term loan will likely be lower than a long-term loan because you make significantly fewer interest payments.If you are considering a short-term small business loan, it’s important to make sure you can pay if off within the appointed term and to assess any fees that come along with it. Additionally, if you are looking at a product like invoice factoring, educate yourself on how factoring fees differ from interest rates to know how much you’ll actually be paying.
Payments Occur More FrequentlyOne of the upsides of a short-term business loan is that you can access funds quickly; but that also means they need to be paid back quickly. Due to the shorter terms, which can be as little as a few months, short-term lenders may require payments on a weekly basis versus a monthly basis. If your sales fluctuate and aren’t reliable, you may find it challenging to commit to frequent payments.
Risk of Getting in a Debt CycleA common pitfall of short-term financing is the risk of getting into a debt cycle: Even though you borrow a small amount, it’s at a very high rate and maybe you aren’t able to repay in time because the term is so short. You then need to then take out another short-term loan to cover the first, leaving you in a debt cycle that’s difficult to get out of.Taking time to assess your weekly and monthly revenue to make sure that you’re able to cover the payments in a timely manner may help you avoid this cycle. It may even help to consult a financial planner or accountant who can help identify any risks and give you a realistic view of your business finances. If you’re able to qualify for a long-term business loan, it may be a better option to avoid the risk of a debt cycle.
Types of Short-Term Business LoansLenders offer a variety of financial products to support businesses who need quick financing. The following products are common short-term options available to small businesses. Keep in mind that APRs for any type of short-term loan are likely to be high compared to long-term business loans.
Term LoansA term loan is one in which you receive a fixed amount of money for which the lender sets a specified repayment schedule including interest. Short-term lenders typically offer term loans with repayment periods of 12 months or less. The business loan term is based on a borrower’s qualifications, loan amount, and other conditions set by the lender.
Business Line of CreditA short-term line of credit is a common short-term financial product that gives companies access to funding up to an approved, maximum amount, with interest only charged on unpaid balances. Short-term business lines of credits are very similar to credit cards, but can be secured with collateral and may offer lower interest rates. They can be useful for managing cash flow and offer the flexibility of accessing funds on a revolving basis. Repayment terms for a line of credit function differently than a traditional loan because borrowers do not pay back in set installments, but according to how much they borrow from the approved amount of credit. So, for example, if you’re approved for a short-term line of credit with a limit of $20,000 but don’t spend anything in the first month, you won’t owe anything to the creditor. Then, if you spend $1,000 the next month, interest only accrues on that amount until it is paid off.When you accrue a balance on your line of credit, you may need to pay it down on a weekly or monthly basis. The details of the repayment terms and requirements will depend on the lender and your business’ qualifications.
Invoice Financing and FactoringInvoice factoring and invoice financing are two different short-term financial products that may be useful for businesses that invoice customers regularly. They are typically most applicable to B2B companies that deal with irregular billing cycles due to delayed invoice payments. Invoice financing uses invoices as collateral to receive a cash advance, but your business is still responsible for collecting on those invoices. Invoice factoring is when invoices are actually sold to a factoring company and that company is responsible for collecting payment. Repayment terms on these short-term financing options are typically 30 to 90 days, in line with the due dates of the invoices themselves.
Inventory FinancingInventory financing is an asset-based, short-term business loan used to purchase more inventory so your business can maintain consistent cash flow during seasonal highs. The inventory your business has or intends to purchase serves as collateral. Short-term lenders then offer funding based on a percentage of your inventory’s value. If you default on the loan, the lender can seize the inventory that you’ve used as collateral. Typically, repayment terms are one year, but can vary depending on the lender.
Merchant Cash AdvanceA merchant cash advance is a form of short-term financing that allows small businesses (“merchants”) to get a cash advance in return for a portion of their future sales or receivables. This option is often considered a bad credit business loan for businesses that have trouble qualifying for other forms of financing. However, merchant cash advances are technically not loans, and companies who provide them do not generally receive the same government oversight as true short-term lenders. For this reason, it’s important to do your research and make sure the cash advance company has a track record you trust.As opposed to a term loan, repayment on merchant cash advances happen in one of two ways:
- Lenders take a percentage of the merchant’s daily credit card deposits
- Lenders withdraw funds directly from merchant’s bank account each business day, also known as automated clearing house (ACH)
Applying for a Short-Term Business LoanApplications for short-term financing will depend on the lender and type of product you’re applying for, but there are a few basics to know when it comes to applying for a business loan. Generally, you will need to take the following steps to prepare for and apply for short-term small business loans financing:1. Check your business and personal credit: This will help you determine what you may qualify for, especially if you’re considering a short-term bank loan, which may have tougher requirements than a short-term online loan.2. Prepare documentation: This will typically include bank statements, tax returns, credit scores, and identifying documents. Traditional banks or credit unions may require further documents, like revenue and profit and loss statements.3. Choose a lender: Compare lenders based on the type of financing you need, business goals, and qualifications. Consider these questions when choosing a lender:
4. Apply for short-term financing: After you’ve chosen a lender, you would typically see if you pre-qualify and/or fill out the application and provide any necessary documents. It’s wise to avoid applying for multiple products at once, as full applications typically involve hard credit pulls. (Pre-qualifications generally do not affect your credit score.) While that may not drastically affect your credit, it may appear questionable to some lenders.
- How much financing do I need?
- What is the money being used for?
- How soon do I need funding?
- What can I qualify for?
- What are the interest rates and fees?
- Can I afford to pay back the loan on time?
Additional Business Loan OptionsIf you’re looking for more long-term financing options for business-related expenses, the following financial products may be useful.
Equipment FinancingEquipment financing can be used for the purchase of business-related equipment like machinery, vehicles, medical devices, and office equipment.
This form of financing may be helpful if your business needs newer equipment but doesn’t have the savings to purchase. If your business is well established and you have good credit, you may be able to secure favorable rates that could make this an ideal choice.
SBA LoansAn SBA loan is backed by the U.S. Small Business Administration (SBA). SBA microloans can be great short-term business loans if you need funds for:
The maximum microloan amount is $50,000, but the average amount is closer to $13,000. You’ll need to apply through an intermediary lender if you’re interested in this type of financing. The interest rates are negotiated between the intermediary and the borrower, but typically fall within the range of 8%-13%.
- Working capital
- Inventory or supplies
- Furniture or fixtures
- Machinery or equipment
Peer-to-Peer (P2P) LendingThis type of financing allows borrowers to obtain loans directly from investors who have available funding. This removes the financial institution who typically facilitates the loan process from the equation, which may translate to favorable rates and may give investors a better return on their money.
With P2P lending, business owners can use online platforms to search for investors who align with their business’ needs and purpose. If the application is approved, money transfer and payments occur directly through the P2P platform. The flexibility offered with P2P lending can make this a solid option for both long- and short-term business loans.
Compare the Short-Term Lenders with Lantern CreditManaging your small business comes with a lot of responsibilities and spending time trying to find the top short-term business loans shouldn’t be another big project to take on. We want to help simplify the process so you can have more time to nurture your business and succeed.By filling out a simple form, you instantly get access to small business financing options matched to your needs and qualifications. Whether you’re just starting out, or have a rapidly growing business, we have solutions for your business.
The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website on credit (https://www.consumer.ftc.gov/topics/credit-and-loans)SOLC20059
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