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Short-term Business Loan

Getting a short-term business loan can help you bridge gaps in working capital.

What is a short-term loan?

Short-term loans are loans or other types of financing designed to meet your immediate financing needs. They can help you bridge gaps in cash flow, deal with unexpected needs for extra business funding, and take advantage of new business opportunities to increase your annual revenue.

Rather than pull funds from other parts of your business, a short-term loan for small businesses can cover your costs while maintaining a healthy cash-flow.

How long is a short-term business loan?

Borrowers of short-term business loans typically must pay off their total loan amount in less than 12 months, but repayment terms can range up to about 24 months.

The main difference between a short-term loan vs. a long-term loan is that a short-term loan is meant for immediate funding needs, while long-term loans are geared toward needs that occur over many years.

Examples of short-term needs include unexpected product demand or an immediate new business opportunity. Long-term needs could include a business acquisition or future expansion.

Both short-term and long-term loans have an application process, including checking your credit score. But long-term loans often have additional requirements, including collateral or limits on the amount of additional funding businesses can take on later. Long-term loans may offer lower interest rates, however.

Types of short-term business loans

When it comes to short-term loans for small businesses, borrowers can choose from several types to find the best fit for them, including loan amount, repayment terms and interest rates.

Business lines of credit

A business line of credit is an arrangement between a lender and borrower that provides a set loan amount for the borrower to access. A line of credit can help you increase your working capital and typically offers more flexibility to borrowers who prefer to have cash on an as-needed basis.

A business line of credit can consist of a secured, unsecured, revolving, non-revolving, or a demand line of credit.

With a revolving credit line, you're able to continuously borrow money from your lender until you've reached your credit limit. Like a credit card, your total credit limit decreases each time you utilize the credit line. When you make a payment, your credit limit goes back up.

Benefits of a business line of credit for small business owners include:

  • You can borrow funds at any time, as long as you don't exceed the maximum credit line amount
  • You don't have to use the total loan amount for which you're approved, which means you do not necessarily have to pay back the total amount to your lender
  • You only pay interest on the amount you borrow from your lender

Small business term loans

A traditional term loan offers borrowers the full amount of funding at one time. Borrowers are then required to repay the loan, plus interest, with regularly scheduled, fixed payments for the lifetime of the loan. Typically, borrowers make payments on a monthly basis.

The length of a term loan can vary. Short-term business loans typically last 12 months or less. Business owners who utilize a term loan with a shorter repayment period may have higher monthly payments but pay off their loan sooner and save on interest.

Invoice factoring

Another type of short-term business financing designed to boost small businesses' working capital is invoice factoring. It's common in industries when businesses wait long periods of time for receivables, such as professional services, as it helps businesses get cash faster than waiting for customer payments.

Rather than a business loan, factoring is the sale of an asset (the invoice). In this case, a third-party commercial company known as a factor usually buys the right to collect on a business' outstanding invoices when they're paid, minus a discount of 2% to 6%. The factor pays about 75 percent of the invoice value up front, followed by the remainder once they've collected on the invoice directly from the customers.

Because you give up a portion of your profits to the factoring company, invoice factoring is generally a short-term solution for a growing small business.

Merchant cash advance

A merchant cash advance offers a different type of financing than a business loan. With a merchant cash advance, you are selling future income in exchange for immediate access to working capital. Instead of collecting payments to cover the advance, the merchant cash advance company automatically deducts a set percentage of your debit card and credit card sales until they recover the advance. By contrast, you can pay other small business loans using funds from other accounts, rather than automatically withdrawing from your sales revenue.

Most merchant cash advances carry high annual percentage rates and higher than average fees that end up raising the total cost of a loan. Because the daily repayment schedule can impact your cash flow, you may need refinancing to repay them. If you have strong sales but struggle with too little credit, less-than-perfect credit, or a bad credit score, you may want to consider a merchant cash advance.

How do short-term business loans work?

Although the structure of short-term small business loans is like traditional business loans, the repayment periods are shorter—typically less than 12 months. They often have less rigid eligibility requirements and can get funded more quickly by lenders, often within a few days, or in less than 24 hours, after you complete the application process.

Unlike when you work with an equity partner or co-owner, with a small business loan, you maintain full control of your business and any potential profits.

Taking out a small business loan helps avoid challenges or complications that result from taking out personal loans to fund your business or borrowing from family and friends.

Why would a business need a short-term loan?

Businesses may find short-term loans very useful in a wide range of situations. Short-term loans can help you increase your annual revenue during a growth period, times of fluctuating cash flow or when you have a need for seasonal purchasing.

Reasons to use a short-term loan include:

  • Accounts receivables vs. payables: Short-term loans can help cyclical businesses bridge cash flow gaps.
  • Short-term operational costs: If you need to hire extra help during the holiday season or require a particular piece of equipment to cover a large job, a short-term loan can help get the job done.
  • Cash flow: When you don't have funding now but can depend on the money coming in soon, a short-term loan can help you get over the hump and operate your business as usual.
  • Emergency repairs: The unexpected occurs from time to time. Whether it's a computer crash or malfunctioning packaging equipment, a short-term loan can quickly provide funds to cover your costs for when an emergency arises.

How to get short-term funding for a business

Short-term loans can offer a financing solution for a small business. You may be able to complete your application quickly online or by phone and access your business line of credit right after approval.

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