Business owners might find themselves in a situation where they need a capital infusion — and fast. That generally takes traditional lending institutions off the table. Banks and credit unions offer business loans, but they come with lengthy and rigorous application processes, which can take days or weeks to get funding.
Enter short-term business loans. These loans are generally easier to get and faster to fund. Depending on the lender and how quickly you provide documentation, you could receive funds in as little as 24 hours. That said, short-term business loans must be repaid quickly and come with high costs, so they’re not right for every business.
Should you consider short-term small business loans? And, if so, how do you find the right one? To help you answer both questions, let’s work through the major pros and cons of this financing option.
What are short-term business loans
Short-term business loans cover several business expenses that require a short infusion of cash. This includes emergency expenses and unexpected or seasonal cash shortfalls.
Banks can offer short-term business loans. These loans are more flexible than other types of loans. The interest rates can be lower than online loans, and repayment terms can be as short as 12 months but can also go much longer if you need more time.
Short-term loans from online lenders usually offer an easy, quick application process paired with looser underwriting requirements. That means they can be a good option if your business needs money fast or has bad credit.
Types of short-term business loans
Some common short-term financing options include:
|Short-term loan type||Description||Best uses|
|Term loans||Also known as “working capital loans,” these loans mean you get a lump-sum amount, then repay it — plus interest — in the agreed-upon term||
|Lines of credit||Revolving lines of credit offer you a maximum amount you can borrow against. As you repay it, you can borrow from that pool of money again.||
|Invoice financing||Lets you borrow against invoices your customers haven’t yet paid. You borrow a portion of that invoice now (typically up to 85 percent), then repay the loan, plus fees and interest.||
|Merchant cash advances||These loans get repaid as the lender takes a portion of your credit card sales, plus a fee.||
Pros of short-term business loans
Let’s take a look at the upsides of short-term small business loans.
One of the biggest perks of these loans comes from how quickly money can hit your bank account. Many fast short-term loans from online lenders can fund in one to three days if not hours. These fast short-term business loans can get your company the capital it needs as close as possible to the moment it needs it.
Business loans from banks can be slow to provide funds, but the repayment terms can be more relaxed than loans from online lenders. You can repay a loan in as little as 12 months or choose longer repayment terms, typically up to 60 months, and pay it off early. Just make sure you’ve chosen a lender that doesn’t charge prepayment fees if you want to pay your loan off early.
Many business owners also consider fast short-term business loans from online lenders because the application process doesn’t require too much time.
Usually, you can apply for these loans online. There’s no need to mail over documents or sit down with someone at a bank. Instead, you can usually upload a few key pieces to validate your cash flow and ownership and let the lender do a quick credit check. If everything meets their criteria, your application usually gets approved in minutes.
Relaxed eligibility requirements
Traditional lending institutions usually require at least two years in business with consistent revenue to issue a loan. On the other hand, online lenders that offer short-term small business loans have looser requirements. You can often qualify if you’ve been in business for a year and bring in at least $100,000 in revenue. You might also be able to qualify with a less-than-stellar credit score.
This is particularly true with higher-risk short-term options, like merchant cash advances and invoice financing.
Be advised that to compensate for the looser eligibility requirements, some lenders charge factor rates rather than interest. Make sure you crunch the numbers to compare that against loans with an APR before you choose one for your business.
Cons of short-term business loans
Before you decide on a short-term business loan, consider the potential downsides.
Smaller loan amounts
Because online lenders don’t dig as extensively into your company’s financing before offering these loans, they generally cap how much they offer. While you find long-term business loans in the millions of dollars, short-term business loans from online lenders often max out around $100,000.
Even if the amount you need is under that limit, keep in mind that any loan fees that come with short-term business loans can eat into the money your business gets.
Short repayment terms
Online lenders offer fast access to funds, but these loans typically have rigid repayment periods between six and 18 months. If you think your business won’t be in a significantly better financial position by the end of the loan term, it might not make sense to take out a loan you’ll need to repay so quickly — especially when you consider just how much interest can accrue during that time thanks to high short-term business loan interest rates.
Depending on the type of short-term loan and the lender, you may have to make payments more frequently than long-term loans. Some online lenders require daily or weekly repayments on short-term loans like lines of credit, working capital loans or merchant cash advances.
Aggressive repayment schedules can be hard to manage and could make it easier for you to default on a loan or need another loan to help cover costs.
Short-term loans tend to come with high interest rates. While people with good-to-excellent credit may be able to secure loans with interest rates between 6 percent and 14 percent, business owners with fair or bad credit won’t be so lucky. Depending on your creditworthiness and the type of short-term loan, interest rates for subprime borrowers can be between 30 percent and 90 percent — or higher.
Fees can also be an expensive problem. Common fees include origination and underwriting fees, but lenders may add additional costs such as processing and wire transfer fees. There may also be penalty fees to deal with, such as late fees if you miss your payment due date or prepayment fees if you try to pay certain loans off early.
Potential to fall into a cycle of debt
Short-term small business loans mean repaying what you borrowed quickly — and at a relatively high cost. Business owners often get tempted to apply for another short-term loan if they can’t keep up. The application process is easy, and the money hits their account quickly, so it might seem like a good option to avoid defaulting on the initial loan.
But this can lead to an ever-growing debt cycle, damaging your company’s short-term cash flow and long-term outlook. This can get particularly challenging since regularly taking on new debt can damage your credit score, making it harder for you to qualify for anything except certain types of bad credit business loans as you move forward.
Ultimately, this debt cycle can be extremely challenging to break out of. You should only take out short-term business loans if you know your business will have the cash flow needed to repay the loan on the quick required schedule.
The best short-term business loans are a good option to help you cover emergencies or cash shortfalls, but they can be expensive, especially if you can’t repay the loan quickly. Make sure this is the right type of financing for you before applying.