Definitive Guide To Short-Term Business Loans

Written by Banks Editorial Team
3 min. read
Written by Banks Editorial Team
3 min. read

If you are looking into funding options for your small business, learn more about short-term business loans, how they work, what types are available and how to get one to fund your small business needs.

What Is A Short-Term Business Loan?

A short-term business loan is a funding source used by small businesses to get over a financial hump. Often referred to as a working capital loan, it’s designed to provide a temporary cash infusion to help smooth out cash flow gaps, cover start-up costs, purchase inventory or pay for major equipment repairs. 

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How Do Short-Term Business Loans Work?

Short-term business loans generally offer condensed repayment periods compared to traditional loans. You’ll get three to 36 months to repay what you owe, and payments are made on a monthly, weekly or daily basis, depending on the lender. 

Types Of Short-Term Business Loans

Before you apply for a short-term business loan, you want to understand your options and how they work to make an informed decision. 

Secured Small Business Loans

Secured small business loans require that you put up an asset as collateral to get approved. You could get a competitive interest rate, but the downside is you risk losing your collateral if you fall behind on the loan payments.

Unsecured Small Business Loans

These loan products are similar to secured small business loans. However, it’s unnecessary to put up collateral to get approved. But you could pay more in interest as they pose more of a risk to the lender. 

Term Loans

Term loans operate like traditional bank loans but come with shorter repayment periods. The most competitive interest rates are typically reserved for borrowers with good or excellent credit. You could qualify for a term loan with a lower credit score. 

Lines Of Credit

A business line of credit is a flexible funding source that lets you borrow on an as-needed basis. You can withdraw from a pool of funds during a set period and make interest-only payments. When the draw period ends, you’ll make principal and interest payments over the loan term. But this amount will fluctuate as business lines usually come with variable interest rates.  

Vendor Credit

Vendor credit is a form of short-term, in-house financing. Most suppliers extend products or services on credit for a 30, 45 or 60-day window, and you could get a discount on the amount of interest you’ll pay if you remit payment before the due date. go

Merchant Cash Advances

Merchant cash advances help small business owners resolve temporary cash flow issues. If approved, you’ll get a lump sum of cash. But instead of repaying the lender, they’ll take a percentage of your future debit and credit card sales. And while they’re easy to qualify for, the factor rate, or cost of borrowing, could make the payments unaffordable. 

Invoice Financing

You can sell your company’s outstanding invoices to an invoice financing company to get cash now. While you’ll pay a fee for this luxury, the upside is you’ll no longer have to chase the party or individual that owes you to collect the outstanding balance. 

Industry-Specific Loans

Industry-specific loans cater to business owners who operate in a specific industry. Lenders specializing in these types of loans have a better understanding of each sector and how those businesses operate.  Here are some examples of industries that may have loans specifically designed for them:

  • Auto maintenance and repairs
  • Beauty salon 
  • Construction 
  • Dental 
  • Healthcare
  • Pawnshops 
  • Restaurant 
  • Retail 
  • Trucking and logistics 
  • Wholesale

Minority Small Business Loans

Minority small business loans come in varying forms and amounts. They’re reserved for women-owned businesses, veterans and companies run by socially or economically individuals. 

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How to Qualify For A Short-Term Business Loan?

The qualification criteria for short-term business loans vary by lender. However, you’ll likely be approved if you’ve been in business for a year or more, earn a specific minimum amount of revenue (varies with each lender) and have good or excellent credit. A lower credit score won’t necessarily disqualify you from getting a loan. Still, you can expect to get a significantly higher interest rate.

Before you apply, gather the following information and documents: 

  • Three most recent months of business bank statements
  • Your company’s tax ID number
  • You annual revenues

You’ll also have to consent to a personal credit check, and the lender may review your business credit profile if you’ve already started building business credit. 

Some lenders may require additional information from you, so it’s best to ask before you apply to expedite the process. 

FAQs About Short-Term Business Loans

Here are some commonly asked questions regarding short-term business loans: 

Can you get a short-term business loan with bad credit?

Yes. You can get a short-term business loan with bad credit, but you’ll likely pay more in interest. Ideally, you want to have a credit score of 600 or higher to qualify. If you have bad credit, consider applying with an online lender, as they tend to be a bit more lenient.

How much does a short-term business loan cost?

It depends on your credit rating. Most lenders offer short-term business loan products with rates between 3 percent and 65 percent or higher. The best interest rates are reserved for borrowers with good or excellent credit.

Can you get a short-term business loan for a new business?

Most lenders require you to have at least one year in business before they’ll consider you for a short-term business loan. However, you could qualify for funding if you have a strong credit score and a detailed business plan that outlines the actions you’ll take to generate earnings.

Where To Get A Short Term Business Loan

There’s no shortage of lenders who offer small business loans, and researching the abundance of options can be tiring. Quickly review and compare business loan lenders.

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