Everything you need to know about short-term business loans
Wed | May 2023
Imagine James, who owns a successful electronics store. As the holiday season approaches, he needs extra cash to buy more inventory - he knows from experience that demand will be high. He needs money now, but his profits from the holiday rush will come later.
What can he do? The answer lies in a short-term business loan. This type of loan is designed to meet immediate cash flow needs, like James's inventory purchase. Unlike long-term business loans, these are usually for a shorter period, typically ranging from a few months to a year. It's an excellent option for businesses that need quick funding to capitalize on time-sensitive opportunities.
However, navigating the world of short-term business financing can be challenging, with many options. This article aims to make the process simpler. We'll cover the basics of short-term business financing and present our top 5 short-term financing products to help you make an informed decision that fits your business needs.
What is a short-term business loan?
Let's think about short-term business loans as a financial band-aid. If your business has a cash scrape (like an unexpected expense) or a cash flow bump (like you need money now for extra holiday inventory), these loans could be your first-aid kit. You'd typically pay them back quickly, anywhere from three months to two years.
One of the best parts? You don't have to have a credit score as shiny as a new dime. Short-term business loan lenders usually aren't as picky.
When you apply, you must show them how much your business makes in a year. Usually, this needs to be between an annual revenue of $50,000 and $100,000 or more. Some funders also want to see your monthly income from the past few months.
Once approved, you'll need to repay the loan, but how often depends on the funder. It could be daily, weekly, or monthly. This, along with how much the loan costs, is calculated by the lender based on their rules.
It's like a relay race. The lender passes you the baton (in this case, the money), and they set the rules for the race. Then, it's up to you to decide if you can finish the race based on those rules (meaning pay the money back under their terms). You're a part of the team, and you need to make sure the rules work for your business.
Best short-term business loans and financing
Now that we've described what short-term business loans are and how they work, it's important to note that several types are on the market, each with its particular characteristics. In the following sections, we will explore the most common types.
1. Working capital loans
Consider working capital loans as the financial fuel that keeps a business running smoothly. These loans quickly put money in the hands of business owners, helping them cover the immediate costs of running their businesses. We're talking rent, payroll, inventory – the works.
They're convenient for businesses that see seasonal sales, providing the cash buffer to keep things running during slower periods. Applying for a working capital loan is a pretty straightforward process. Plus, you don't need to give up any ownership in your company to get one. It's like asking a friend for a loan – you get the help you need without losing control over your business.
Plus, if you make regular repayments, it can boost your business's credit score, setting you up for easier access to other types of funding. Regarding the cost, the interest rates for working capital loans are usually shown as an annual percentage rate (APR). So, if your business borrowed $10,000 with an APR of 10%, you'd be paying back an extra $1,000 over a year.
Some funders might use a factor rate method instead of an interest rate. A factor rate is a tool expressing interest rates on business financing in decimals. It's like a one-off cost that immediately applies to your whole loan amount, giving you a clear picture of the total cost of borrowing right from the get-go. It's always best to check which one your lender uses so you know what to expect.
2. Invoice factoring
Think of invoice factoring like a cash advance on your work. You've done the job and sent the invoice, but the customer still needs to pay. Invoice factoring, also called accounts receivable financing, lets you get paid now rather than waiting for the customer to pay up. This could be a real lifesaver if you need money ASAP to keep your business going.
Here's how it usually works:
First, your business completes work for a client, and you send them an invoice. If your client typically takes their sweet time to pay and you need cash pronto, you can contact a factoring company.
After the factoring company approves your business, you point out which specific invoices you want to get an advance on. The factoring company then takes a magnifying glass to your client's track record to make sure they're the punctual, pays-on-time type.
If the factoring company gives the invoice the green light, you pass the baton - in this case, the invoice - to them. The factoring company then hands over a chunk of the invoice amount to you - usually around 80% to 90%.
With the cash in your hand, you can use it however, your business needs, be it for expansion, buying new equipment, or making payroll. Meanwhile, the factoring company rolls up its sleeves and collects the payment from your client.
After your client pays, the factoring company subtracts the advance they gave you, along with any interest and fees, and you get any leftover money.
Just keep in mind that the fees and interest for invoice factoring can be higher than other types of financing, so it's always wise to shop around and ensure you understand all the terms before you sign anything.
3. Revenue based financing
Imagine revenue-based financing, previously known as merchant cash advances, like a time machine for your future sales. Your business gets a cash boost now in exchange for a slice of your future sales. It can be a nifty solution if you need cash quickly, have less-than-stellar credit, or don't qualify for traditional bank loans. Here's how this financing fandango works:
Your business asks a funder for a cash advance and provides details about your sales history and revenue.
The funder puts on their detective hat, scrutinizing your business's creditworthiness and future money-making potential. They then figure out how much cash they can advance you and the terms of the agreement.
If they give you the thumbs up, the funder hands over a hefty lump sum of cash, anywhere from $2,500 to $1 million. Most of the time, the advances are between $5,000 to $500,000.
Now, it's payback time. Instead of a set monthly amount, the funder takes a cut of your future sales. They typically collect this directly from your business banking account daily or weekly.
You continue to pay back the advance, typically over several months to a year, based on the terms of the agreement.
Keep in mind, though, this type of financing can be a bit of a gamble for the funder. As a result, the costs are usually higher to reflect that risk.
Does this sound like the golden ticket your business has been waiting for? If you're nodding along and want to learn more about this type of financing, we've just the place for you to explore - One Park Financial. We firmly believe that small and medium-sized businesses should have the same access to funding as their big league counterparts. That's why we connect you with financiers who specialize in working with businesses just like yours.
Think of us as your business's financial wingman, guiding you toward your needed funding. Don't wait - see if you pre-qualify today by filling out our simple online form. We can't wait to help you take your business to the next level!
4. Line of credit
Think of a line of credit as your business's personal financial safety net. It's a flexible financing option that lets your business borrow what it needs when it needs it and pay it back over time. Depending on the lender and your business's financial health, how much you can borrow with a line of credit can range from $10,000 to $500,000 or more.
There are several common factors that funders consider when evaluating a business's eligibility for a line of credit:
Credit score: You'll usually need a minimum credit score of 600 to 650. The higher your score, the better your terms and the more you can borrow.
Business age: Your business should have been running for at least six months. Some funders want to see a longer track record, like two years or more.
Financial documents: Lenders like to peek at documents like tax returns, bank statements, and profit and loss statements. This helps them gauge your business's financial health and how well it can handle paying back the line of credit.
Remember, a line of credit costs capital, typically in the form of an interest rate, shown as an annual percentage rate (APR). But remember, just because you have access to funds doesn't mean you should use them all at once. Borrowing more than you can realistically repay could land your business in hot water.
So, before you apply for a line of credit, make sure your business has a strong credit history, enough cash flow to handle repayments, and a clear plan for using the credit responsibly.
5. Equipment loans
Equipment loans are a popular financing form that allows businesses to purchase or lease equipment necessary for their operations, such as machinery, vehicles, or technology. While the repayment period for equipment loans can vary depending on the lender, they are generally considered short-term loans since the loan term is typically shorter than the expected lifespan of the purchased or leased equipment.
Regular payments are usually required, from monthly to quarterly, over 1 to 5 years, depending on the lender and equipment cost. The interest rates for equipment loans can be either fixed or variable, depending on factors such as the borrower's creditworthiness, the cost of the equipment, and the loan term.
Equipment loans can be a practical solution for businesses that need to purchase expensive equipment but require more funds upfront. By spreading the cost of the equipment over time, companies can maintain their cash flow and budget more effectively, allowing them to invest in other areas of their business or keep more cash on hand.
However, while equipment loans offer several advantages, such as fixed monthly payments and access to necessary equipment, businesses should carefully consider potential drawbacks, such as high-interest rates and collateral requirements, before applying for financing.
Are you looking for fast working capital? We can help!
Ready to get a hassle-free, fast-working capital loan for your business? At One Park Financial, we understand how frustrating it can be for small and mid-sized companies to apply for credit from a bank only to be met with a long and drawn-out process and little to no success. That's why we're here to help.
With our easy online pre-qualification process, you can get started in just minutes and receive your funds in as little as 72 hours. Plus, we offer more than just funding - we work with you to help your business grow and thrive.
Suppose you're ready to work with us. In that case, your business must have operated for over 90 days and generate a monthly revenue of at least $7,500. Don't wait - speak with one of our funding experts today to get started. See how we can help your business reach its full potential.
Disclaimer: The content of this post has been prepared for informational purposes only. It is not intended to provide and should not be relied on for tax, legal, or accounting advice. Consult with your tax, legal, and accounting advisor before engaging in any transaction.