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A short term loan is an advance that can be paid back anywhere from 3 months to 18 months. You can use these fast business loans to cover cash flow gaps, expand operations, or cover any unexpected expenses and emergencies. The purpose of short term business loans is to be able to cover whatever financial need the business has without hurting operations. When considering these small business loans, it’s important to apply for an amount that you feel comfortable paying back in a short amount of time.
Here's how a short term business loan works
Short term business loans function the same way as any other loan. A borrower receives funds that they agree to pay back by a certain time. Just like other business loans, short term loans come with fees and interest rates. The main differences are that these fast business loans have smaller amounts, shorter payment periods, and higher interest rates.
It’s not uncommon for lenders, or alternative lending companies, to request that borrowers pay back the loan on a weekly or daily basis. Having enough capital to cover these payments will ensure that you can pay the small business loan on time and without penalty. Business owners often choose to assess their debt and cash flow before applying for a short term business loan. If you believe you would need more than a week to come up with the loan payment, you may want to consider another business funding option with longer terms.
How Can a Short Term Loan Help a Business?
You may be wondering when a short term business loan would actually be beneficial. While they’re not for every business, they do provide some relief during unexpected situations. For example, a small business that comes across an opportunity to deliver an enormous order of products to a customer who can’t pay the purchase order right away can use the funds from short term business loans to cover the inventory expense. Once the customer pays, the business owner should be able to pay off the remaining balance on the business loan. Without the help of the short term loan, the business wouldn’t have been able to take on such a great opportunity. These fast business loans are extremely helpful for owners who know they can pay off the loan in full in a short amount of time.
How to qualify for short term business loans
Most companies are able to qualify for a short term business loan. This is why this financing option tends to be desirable. Lending companies look at business owners’ personal credit scores to determine how qualified they are. Typically, they allow borrowers with an average credit score to take out a short term business loan.
Lending companies also tend to look at a business’s cash flow projections. Small businesses that are able to demonstrate consistent monthly revenue are more likely to receive approval over a business that has inconsistent months of revenue. For instance, a business that steadily brings in $7,000 or more on a monthly basis is considered stable as compared to a business that fluctuates between bringing in $5,000-$7,000 each month. The purpose of looking into cash flow is to ensure that the business won’t be relying on cash flow financing through the short term loan for more than 30 days.
At the same time, lending companies normally like to check a business’s bank statement to see how many times their balance has gone negative. For example, lending companies will consider qualifying a small business that has had a negative balance four times over the span of three months over a business that has had a negative balance five or more times over the same span of time. If a business can’t keep a positive balance in their business account, it likely shows that the applicant will have trouble making payments on time.
Characteristically, borrowers don’t have to jump through hoops to get qualified for short term business loans. Once you submit all of the necessary documents, the approval process is fairly quick. However, short term business loans could potentially cost you more than you think.
Information lending companies will request:
- Business plan
- Balance sheet
- Cash flow projections
- Tax returns
- Active accounts
- Proof of licenses pertaining to the business’s industry
How much will a short term business loan cost?
What are the Rates on Short Term Business Loans?
The biggest cost associated with short term business loans are the rates. These fast business loans need to be repaid in a short amount of time. This is why they tend to be considered riskier than longer term loans. Essentially, you’re paying more for the ease of receiving cash fast.
Typically, short term business loan rates are calculated by adding the prime interest rate to some sort of premium. The lending company determines the premium. They tend to base the premium on how much of a risk they believe your business will be for them. Fortunately, you can negotiate the premium in order to get a more affordable rate on a short term business loan. Being knowledgeable on the current prime interest rate will help you negotiate better terms.
Why are Short Term Business Loans so Costly?
The high cost of short term business loans is mainly due to the risk associated with the business receiving the funds. The higher the risk, the greater the rates. Also, remember that it’s not uncommon for lending companies to request payment on a weekly, or even daily, basis. This could become costly if it impedes on your business’s cash flow.
Analyzing your business’s cash flow projections could give you a better picture of whether or not a lending company would consider you a risk for a short term business loan. If you believe your business will be considered a risk, research other business loan options with longer terms and lower rates.
A short term business loan is a great option for a company that is either able to make payments on a weekly or daily basis, or can pay the balance in full within a 30 to 60-day period. Short term business loans have the potential to contribute to a business’s growth if used wisely. Unfortunately, they could also leave owners with a high interest loan they can’t afford. Proceed with caution.