Short-term business loans are a great way to help finance your business over a short period of time. They can help provide that instant cash boost that many companies may need whether they’re just starting or they’ve fallen upon hard times.
What are short-term business loans, and how would you go about getting one for your business? In this article, you’ll learn about these types of loans, who they’re best for, and how to get one.
What is a Short-Term Business Loan?
A short-term business loan is one that you can use to help finance your business, typically short-term only. This is a loan to help those in need of working capital without it causing too much impact on daily operations within the company.
These short-term business loans could be anywhere from £1,000 up to £500,000, depending on your needs and what you can afford.
Types of short-term business loans
There are several short-term business loans that you can consider for your business. These include:
Merchant cash advances
A merchant cash advance is a type of loan that you can take over a short period. It’s a cash advance that you pay back through the transactions you make as a business. The lender loans you the money ahead of time, and you pay it back as a percentage of each transaction until it’s paid off.
Lines of credit
A line of credit is very much the same as a credit card. A limit is set depending on the business finances, and then you can withdraw funds as and when you need them. It’s then repaid through monthly instalments.
Online or instalment loans
These short-term loans are often available online, with the whole process done from application to approval. As soon as the loan is approved, the money is sent straight to the borrower’s bank account.
This type of loan is done through your business accounts receivables. The lender loans the money on any invoices that have yet to be paid.
Business credit cards
Business credit cards are another option when it comes to borrowing money for short periods of time.
How Can I Get a Short-Term Business Loan?
Short-term business finance can be relatively easy to get, especially for a lot of small to medium business enterprises. They’re an unsecured, short-term business loan that requires no collateral as security against it.
Typically, in order to get a short-term business loan, you’d disclose your business credentials with the relevant lenders. This would also include sharing your own contact details before the application process begins.
Once your application is sent, the lenders will come back with their quotes which you can then filter through and pick the best one for you. After you’ve signed the relevant document, you’ll get access to your funds instantly or typically within 24 hours.
How Do Short-Term Business Loans Work?
For short-term business finance, you’ll be required to pay the loan back reasonably quickly. Depending on what loan type you choose and the lender, of course, will dictate your repayment terms.
These loans tend to be unsecured, meaning you don’t need to provide collateral such as property or assets in order to borrow.
With short repayment terms, you do not have to make monthly repayments year after year; instead, they can be paid off fairly quickly.
What Are Short-Term Business Loans Used for?
You can use short-term business finance for any manner of things that relate to daily operations. This might be any of the following:
- Fund set up costs and operations for early stages of business
- Help fund ventures for expansion and renovation
- Inventory purchases
- Recruitment and employee wages
- Cost of utilities, paying bills, etc.
- Business emergencies
- Training staff
- Cash flow management
- Investment for marketing and advertising the business.
There are lots of ways that a short-term loan can benefit a business no matter who they are or what they may need the loan for.
Who Are Short-Term Loans Ideal for?
Short-term finance is often more beneficial for those who need a quick cash injection ahead of time. Some may have a fairly healthy working capital most of the time. There can sometimes be cases where that falters, whether it be intended or unexpected.
It’s worthwhile getting this business funding if you’re a small business that needs help setting up financially to companies where cash flow has become problematic for any number of reasons.
Do I Qualify for a Short-Term Business Loan?
When it comes to business qualify criteria for short-term loans, any sized business can apply. From start-ups to big companies, it’s business finance that isn’t exclusive.
In order to apply for the loan, you need to be VAT registered and, for the most part, have a minimum monthly turnover. Some finance providers will only lend to limited companies, so it’s worth checking the lender’s criteria.
The Pros and Cons of Short-Term Business Loans
There are advantages and disadvantages of short-term business loans. However, it’s worth knowing them to help your business make an informed decision.
- Short repayment terms – These repayment terms are typically from 3 months to a year. Much quicker than most other business loans.
- Quick access to cash – The loans can be arranged and sent to your bank in under 24 hours for most lenders.
- Typically unsecured – These unsecured business loans mean that you don’t need to put any collateral at risk as security for the loan.
- Higher interest rates – As the loan is offered over a shorter period of time, the lenders will typically charge higher rates as a result.
- Early repayment fee -Lenders choose to charge fees to businesses in order to pay off the loan before the term ends. This can make it more costly for the borrower.
- Borrowing cycle – Whilst they’re easier to obtain, it makes it easier to get into a negative cycle where you become financially dependent on borrowing money.
There are plenty of reasons you should get short term finance, but it’s always important to consider your options before proceeding.
Is a Personal Guarantee Required to Secure a Short-Term Business loan?
In most cases, lenders will require a personal guarantee. Often these loans will be secured against your home (if you own one).
This means you promise you’ll pay back the money with personal funds if you can’t make repayments.
What Interest Rates Can I Expect on Short-Term Business Loans?
When it comes to interest rates on short-term business loans, they will tend to be higher. However, this can depend on how long the term length is. It will also vary depending on your business and the current health of your finances. It will also factor in other credentials you’ve supplied regarding your business.
This helps the lender create interest rates dependent on the risks being taken. They can also vary from lender to lender, so it’s essential to be aware of this when shopping around.
Typically, you can expect to pay interest between 8%-15% for unsecured loans. So it’s good to do your research to find the best one. You should also look out for early repayment fees.
Is a Short-Term Loan Right for My Business?
With so many traditional loan options to choose from as well as alternatives, is a short-term loan right for your business? The answer is yes… and no. It all depends on your needs as a business. Take a look at your business finances and understand whether or not this is something you require financially.
It might be that this minor blip in the road shall pass, or that you do require one of the many traditional loans out there.
There are alternative options to short-term loans, which include:
Medium to long-term business loans
These are like short-term loans, but they have more extended repayment periods. These can tend to be anywhere between one and twenty-five years. You may find the interest rates are significantly lower too with these loans.
Business credit cards
Business credit cards are often a suitable solution for those who need flexible repayment terms. With many credit card providers, there are options to pay back the money you borrow in small or big chunks. Again though, this is something that could negatively impact your credit score.
Can I Get a Short-Term a Business Loan If I Have Bad Credit?
Even though having a poor credit history limits your options, it doesn’t stop you from getting a business loan. It’s not generally an obstacle you face when it comes to small business loans. Alternatively, if you’ve found that no banks will lend to you, there will likely be other finance providers who will.
Whilst it’s not essential, improving your credit ratings as a business can be helpful in other areas. It’s always worth trying to improve your credit score where possible.
Who Provides Short-Term Business Loans?
For short-term loans, you’ll find that many of the high-street banks will offer these opportunities for finance. Not only that, but you’ll have the option of private lenders and various independent companies that you can loan from too.
You may find it helpful to hire a broker to look for you. Otherwise, there are plenty of comparison sites that you can explore to help find the right option for you.
Make sure you consider all your options when seeking external funding, and be sure to weigh up the pros and cons before deciding.
How soon can I receive my short-term business loan?
The time it takes can vary from lender to lender. However, when picking a short-term business loan, payday loans can often be the quickest to access. You’re likely to receive the loan within a matter of hours, whereas it can take days or weeks for other loan options.
What are the alternatives to short-term business loans?
There is a number of other short-term business finance options that you can pick from when it comes to alternatives. Some have taken advantage of the increasingly popular peer-to-peer lending platforms. There may be grants available for the business as well as crowdfunding opportunities, which for both wouldn’t need paying back.
Do short-term loans affect your credit rating?
All loans affect your credit rating, but as long as you adhere to the lender’s terms, you should be fine. However, your credit rating will suffer when you don’t pay a loan back.
How much can I borrow with a short-term loan?
In most cases you can borrow anywhere between £1,000 to £500,000 in the UK.