Short-term business loans allow entrepreneurs to borrow money for payroll, emergency bills, and other cash flow issues. These loans have APRs from 3% to 50% or greater. Rates vary by financing type, lender, and borrower creditworthiness.
How Do Short-Term Business Loans Work?
Short term loans for business work like standard loans but have shorter repayment terms. Usually, less than 12 months, short-term repayment lengths range from three months to three years. Short-term business loans may have higher monthly and more frequent payments.
Most installment loans are due monthly, however short-term loans may require weekly or daily payments. Short-term loans are more likely to lead to a refinancing or debt trap, when the borrower keeps refinancing to lower and delay payment, incurring interest.
Short-Term Business Loan Types
Common short-term business funding includes:
- Loans to businesses. Traditional business term loans provide the borrower a flat sum and require equal payments over the loan term. The borrower can’t access funds again after repaying the loan, and interest accrues. We recommend this financing option if you require a lot of money upfront.
- Credit lines for businesses. Business line of credit allows owners to access a specific amount of cash as needed. Only the borrowed loan component accrues interest. The credit line can be drawn on again during the draw term after repayment. You can get cash as needed with this short-term borrowing.
- Invoice factoring. A business sells its unpaid bills to a third-party factoring company for 70% to 95% of the invoice value. The factoring provider collects invoices and pays the business the balance, less 0.50% and 3% monthly factor costs.
- Merchant cash advances. A merchant cash advance (MCA) lender lends you a lump loan to be returned with future sales at a fixed rate. Flexibility and high APRs are characteristics of MCAs.
Short-term Business Loan Comparison Tips
Compare short-term business loans using these tips:
- Find suitable repayment conditions. If you want to pay off debt quickly, compare lenders’ repayment conditions. While shorter repayment terms have higher monthly payments, they save money on interest over time.
- Choose how to get your money. You can usually get your business financing in a flat sum or as needed. Choose a typical working capital or term loan for upfront funding. Consider a company line of credit if you wish to spend funds as needed.
- Watch for extra charges. Some lenders offer fee-free business loans without origination, late payment, prepayment, or other loan expenses. This doesn’t always happen. When shopping for the best terms, check a lender’s fees. Include extra fees in your decision.
- Assess lender customer support. Before signing a loan arrangement with a lender who can provide the money you need at fair conditions, investigate their support choices. If repayment troubles arise, customer support can be crucial. Check the lender’s customer service and reviews to make sure it fits.
Pros and Cons of Short-Term Business Loans
Even if short-term company loans are easier to get, they still carry hazards. Before getting a short-term business loan, weigh the pros and cons.
- Easy to qualify for
- Speedy funding
- Receive client payments faster with invoice factoring.
- Can be costly
- Usually for working capital
- Troublesome repayment terms
- No factor-rate early payoff saves
If you consider a short-term business loan to be a good fit for your business, contact Fundshop.