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Definitive Guide to Short Term Business Loans

Written by Banks Editorial Team

Updated April 14, 2024​

6 min. read​

short term business loans

Small businesses need capital to take advantage of business opportunities and maintain operations. As a result, many companies turn to small business loans for 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, the choices available, and how to get one to fund your small business needs.

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What Is a Short Term Business Loan?

A short term business loan is a funding source small business owners can 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, a short term business loan is designed to provide a temporary cash infusion to 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.

Some lenders have quick application processes and provide the funds within 24 hours of approving you. However, other lenders can take weeks or months to provide a loan after you submit an application. Understanding wait times is 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. That way, you can 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 require you to carry more risk than other loans, but they’re more affordable as long as 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.

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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 to you, you’ll get hit with higher interest rates. Unsecured small business loans pose a greater risk to the lender, and they’ll offset that by increasing your rate.

Term Loans

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. If you do receive 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 scores.

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 funds from your credit line during a set period of time 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. They are useful if you need fast funding. When you repay your line of credit, you can continue borrowing against it as long as the draw period is open. Whereas, 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 of a line of credit is the variable interest rate. Since the interest rate fluctuates, you can get stuck paying more interest than you anticipated, 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 your interest rates fall.

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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.

Vendors may also offer credit in lieu of a refund. The customer can redeem the credit for a future purchase. When you’re the vendor, giving customers credit on refunds 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 cost of borrowing capital, also known as the factor rate, could make the payments unaffordable.

Invoice Financing

Many businesses use invoices to receive payments from clients. While this payment method works well for paying clients, it can become a hassle when clients pay late. You 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 invoice factoring companies have you continue collecting payments from clients, allowing you to maintain the relationship. Other companies will pursue the payments directly.

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
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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?

Funding from a business loan can arrive in your bank account within a few days or take several months to be released. It depends on the type of loan, the lender, and other factors. SBA-backed loans usually take the longest to receive. You could wait for over a month just to get approved.

Loans with quicker approval may have higher interest rates, but they give you faster access to funding. If you need capital immediately, an online lender may provide a better turnaround while maintaining competitive rates. A 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 when 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.

That said, 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 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 documents you need and assembling them in advance will help you get your loan faster.

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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 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.

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 take time. However, it’s worth the effort as shopping around can save you a lot of money. Look for online lenders that can start your application and approval without a hard credit check and that can provide fast funding. If you need a short-term business loan, consider using an online lending solution designed for small businesses.

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