As a business owner, there might come a time when you need funding to fulfil your business plan and stay on top of your industry.
Getting a short-term business loan might be a possible way to secure it.
You might wonder, "How can I apply for short-term funding, and how can it benefit my business?"
Here's everything you need to know about short-term business loans and how your company could grow by utilising them.
What are Short-Term Business Loans?
Short-term business loans are one of the most common ways to find financial support to address your business needs over a short period of time.
You can easily secure a short term business loans from banks, credit unions, and online alternative lenders.
Interest rates, the loan period, and payment terms can vary significantly for this type of business funding, especially between secured and unsecured loans.
However, these are usually best used for any sudden expenses your business can encounter.
Types of Short-Term Business Loans
A short-term loan can differ based on the processes that go into their approval.
Short-term business loans can be categorised into 3:
Secured Short-Term Business Loans: These loans use an asset or collateral to secure the loan. A secured loan usually has a lower interest rate with a higher principle amount, taking longer to process.
Unsecured Short-Term Business Loans: These loans don't require any assets to get approval, making the process faster. However, unsecured business loans can have higher interest rates and additional fees.
Commercial Loans: These are usually in the form of a business overdraft or line of credit where you’re given ongoing access to a lump sum that you can withdraw at any time. All you have to repay is the amount you spent and the related interest.
Eligibility Requirements for Short-Term Business Loans
Many factors help short-term business loans stand out compared to others. However, before your lender approves, you must have all your requirements in order.
It's best to secure the following to be eligible for a short-term business loan and to secure approval faster:
Information on the type of business you’re operating, how long you’ve been in business, and your annual turnover
Desired loan amount and purpose
Credit history
Minimum monthly revenue of $5,000
Active ABN or ACN
Must be in the business for AT LEAST six months
Note that requirements can vary, and lenders can ask for additional documents, business bank statements, or check your financial history before you receive approval.
Applying for short-term loans can be more challenging if you're going for a traditional bank loan since they can ask for your bank statements and other similar documents.
Benefits and Downsides of Short-Term Business Loans
Compared to a traditional loan, these are best used as a quick fix for funds, making them preferable for many businesses.
However, they still come with their pros and cons, just like any other business loan available.
Pros of Short-Term Business Loans
These are the most common advantages you can get when applying for a short-term loan:
Fast Application and Funding: Compared to other types of loans, these tend to have a fast approval process, making this expedited process great for sorting out unexpected expenses. You can also apply online and even get it on the same business day.
Easier Access to Unsecured Business Loans: Requirements tend to be more flexible, making loan applications more accessible.
Variable Interest Rates: If you opt for alternative lenders, they can easily alter their rates and offer competitively against other lenders.
Flexible Repayment Terms: You can usually repay earlier without worrying about additional repayment fees and negotiate your repayment plan with your lender.
Cons of Short-Term Business Loans
While these loans have many positives, their cons should always be factored in, in case it could affect your business.
These are the most common disadvantages of these loans:
High-Interest Rates: Since they don’t last long, they usually have a higher interest rate than longer loans, accumulating interest over time. Unsecured loans also charge raised interest rates because no assets or collateral are involved. Some can have a fixed interest rate, while others use a factor rate, which can get quite expensive.
Shorter Repayment Period: You might have to pay it daily to weekly if your loan term is shorter.
What You Can Do With a Short-Term Business Loan
If you find the right loan, they can quickly help your business seize opportunities as they arise.
These are the different scenarios you could address with your short-term business loan.
Manage Cash Flow Effectively
Your financial situation might not always be as consistent. There will be seasons or months when business can be slower.
Applying for short-term loans can help you manage those slower days and keep your business going by keeping your cash flow steady and stable.
Cover Unexpected Costs and Emergency Repairs
It's common to encounter unforeseen situations in a business. You can then easily use the money to cover additional costs and other sudden expenses.
Their fast application process allows you to settle those dues as quickly as possible.
FAQs
You might have more questions about applying for a short-term business loan.
We've gathered the most common ones to help you with your research.
How Much Can I Borrow With a Short-Term Business Loan?
It depends on your lender and the specifics of your loan application. Usually, it can range from $5,000 to $500,000.
However, the loan amount they can offer will depend on whether you satisfy their lending criteria and how much you can afford to repay.
A new business might receive a lower offer than a more established one since their documentation can't provide enough information regarding the stability of their business.
Is Short-Term Finance Better Than a Long-Term One?
It depends on your needs.
A short-term loan is best for unexpected costs, buying extra stock, or grabbing a time-sensitive business opportunity.
They usually last a month to three years and can have higher interest rates. You can also expect upfront fees that are a percentage of your loan amount.
On the other hand, a long-term loan is usually better for purchasing assets or acquiring another business.
They have more extended repayment periods lasting three to five years, and its cost can add up over time. It also usually has upfront, ongoing fees and early repayment fees.
Conclusion
Small business loans are a valid option for small businesses to improve their cash flow, stay afloat and reach for business opportunities as they come.
If you're looking for fast access to cash to alleviate your financial circumstances, a short-term business loan could be a possible solution.