Small businesses need capital to capitalize on business opportunities and maintain operations. As a result, many companies utilize small business loans to gain additional funding when their cash flow falls short. Understanding how these loans work can help grow your business while managing debt responsibly. Our comprehensive guide will detail how these loans work, your choices, 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 small business owners use to get over financial humps. Some companies have seasonal business models and rely on loans to stay afloat during slower months. Other businesses use loans to cover current expenses, so they have additional capital for larger investments. 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 startup costs, purchase inventory, or pay for major equipment repairs.
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. Lenders will ask for your credit score, annual revenue, and other details during the application process. Business owners with strong numbers across the board usually secure lower interest rates and higher loan amounts. Each lender has different requirements and terms. You can get a short term business loan from Mulligan Funding if you earn over $120,000 in annual revenue. While a great credit score helps, it’s not required to get financing with Mulligan Funding.
You have to submit an application before receiving your loan proceeds. Some lenders have quick application processes and provide the funds within 24 hours of getting approved. However, other lenders can take weeks or months to provide a loan after you submit an application. Understanding wait times become more critical if you have an urgent need for these funds.
Types Of Short Term Business Loans
Before you apply for a short term loan, you want to understand your options and how they work to make an informed decision. Each financing option has varying payment structures, loan amounts, interest rates, and risks.
Secured Small Business Loans
Secured small business loans have more risk than other loans, but they’re more affordable if you can make payments. These financing options require that you put up an asset as collateral to get approved. Some of these loans use the purchased asset as collateral, such as equipment loans. Secured small business loans have competitive interest rates, 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. While that may sound like a good thing since these loans carry less risk, you’ll get hit with higher interest rates. Unsecured small business loans pose a greater risk to the lender, and they’ll offset the risk by increasing your rate.
Term loans operate like traditional bank loans but come with shorter repayment periods. These loan offers are available for people with good and bad credit. While it’s not impossible to get one of these loans with bad credit, you’ll end up with a higher interest rate. The most competitive interest rates are typically reserved for borrowers with good or excellent credit.
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.
The great thing about this funding source is that you only pay interest when you borrow against the credit limit. You can take your time when using capital from your line of credit. They also help if you need fast funding. When you repay your line of credit, you can continue borrowing against it instead of submitting another loan application. If you get a small business loan and pay it off, you will have to go through the entire loan application process again to borrow more capital.
The downside with a line of credit is the variable interest rate. Since the interest rate fluctuates, you can get stuck with higher interest than you would expect, especially during economic cycles of rising interest rates. On the other hand, a variable rate helps when interest rates are declining, but it may take a while to see interest rates fall.
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. Vendors may also offer credit in lieu of a refund. The customer can redeem the credit for a future purchase, but giving them credit instead of cash can give you extra time to deploy the funds you received from the purchase.
Merchant Cash Advances
Merchant cash advances help small business owners resolve temporary cash flow issues. If approved, you’ll quickly receive new funds in your bank account. But instead of repaying the lender, they’ll take a percentage of your future debit and credit card sales. While they’re easy to qualify for and provide an immediate lump sum of cash, the payments can become unaffordable. The cost of borrowing capital, also known as the factor rate, could make the payments unaffordable.
Many businesses use invoices to receive payments from clients. While this payment method works well for paying clients, it can become a hassle for clients who pay late. You’ll have to follow up with them and keep track of payment dates. Invoice deadlines complicate matters since some clients don’t have to pay until several months after receiving the invoice.
Invoice financing options allow you to get money from your invoices before receiving payments from clients. You can sell your company’s outstanding invoices to an invoice financing company to get cash right away. Some companies have you continue collecting payments from clients, allowing you to maintain the relationship. Other companies will chase parties and individuals who owe you.
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
- Trucking and logistics
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 disadvantaged individuals. The Small Business Administration sets aside funds for this group and has competitive rates. Any SBA-approved lender can give these loans to qualifying businesses, but they take longer to receive. The approval process for SBA-backed loans can take several months.
How Long Does It Take To Get A Business Loan?
Business loans can arrive within a few days or take several months to receive. It depends on the type of loan, the lender, and other factors. Mulligan Funding gives clients their loan proceeds a day after getting approved as part of their fast funding process. SBA-backed loans usually take the longest to receive. You can be waiting for over a month just to get approved.
Mulligan Funding provides some business owners with quick approval. You may only have to wait a few hours before getting approved for a loan and then a day or two to start using the loan to grow your business. Loans with quicker approval usually include higher interest rates, but you don’t have to sweat out waiting for the SBA to approve your loan in 1-3 months. If you need funds immediately, an online lender like Mulligan Funding can provide a better turnaround while maintaining competitive rates. The quick turnaround also makes rejections and mistakes on your application less burdensome. It’s easier to resubmit a corrected application or seek a lender with less stringent requirements if the loan process is quick. Waiting over a month just to learn your SBA loan application got rejected will further stall your efforts to obtain the necessary capital for your company.
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. Therefore, a lower credit score won’t necessarily disqualify you from getting a loan. Still, you can expect to get a significantly higher interest rate if you don’t have the best score. Loans for startup companies may also have higher interest rates, but lenders will be more generous if you can demonstrate strong revenue or have a good credit score.
Before you apply, gather the following information and documents:
- Legal documents, such as your business licenses and registrations
- Three most recent months of business bank statements
- Balance sheet
- Cash flow statement
- Your company’s tax ID number
- Your annual revenue
- Collateral if necessary
- Business plan
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. Knowing what documentation you need and assembling them in advance will help you get fast funding.
FAQs About Short-Term Business Loans
Here are some commonly asked questions regarding short-term business loans:
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.
It depends on your credit rating and other factors. 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.
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. However, few lenders come close to offering the same advantages as Mulligan Funding. The online lender does not do any hard credit checks and can provide fast funding within 24 hours. As a result, Mulligan Funding can provide enough capital for most of your needs, with loan amounts ranging from $5,000 to $2 million. You can visit Mulligan Funding’s website and request a free, fast business funding quote to see how much you can receive.