A short-term business loan is a form of financing designed to help companies to meet their short-term cash flow needs. It can be an excellent option when a business requires funding to address immediate financial needs. These loans are usually for a shorter period than traditional long-term business loans, typically ranging from a few months to a year.
You can use it for various purposes, including working capital and inventory purchases; however, knowing where to begin your search can take time and effort with many business loans available.
In this article, we will go over the basics of short-term business financing and our top 5 options in terms of short-term financing products.
What's a short-term business loan?
Short-term business loans can be an excellent solution for businesses facing cash flow gaps, working capital needs, or emergency expenses that require prompt attention. Depending on the financing company, these loans typically come with a shorter repayment period, ranging from three to twenty-four months.
One of the key advantages of short-term loans is their flexibility. Small business owners can obtain smaller amounts ranging from $5,000 to $500,000 or even more, making them an appealing option for those who do not meet the strict requirements for traditional bank loans.
Short-term loans usually have less stringent eligibility criteria than long-term loans, enabling newer or smaller businesses to qualify even with lower credit scores and shorter business histories. To secure financing for your business, you must show annual revenue requirements- around $50,000 to $ 100,000 or more. Or a monthly income for the past three months of at least $7,500.
There are several ways to get short-term business loans. For example, online financiers can provide you with fast financing with a process that often takes one to three business days.
How does repayment usually work?
Depending on the financing institution you work with and the financing product, short-term business loans offer various repayment options, such as daily, weekly, or monthly payments, each with varying costs of capital.
Funders' price to risk, therefore the term, cost, and repayment options will vary based on their underwriting criteria. You don't get the "choose" a repayment option, the funder determines your repayment options, and you, as a business owner, need to decide if it fits your business's needs.
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 and how to acquire them.
Fast-working capital loans
Fast-working capital loans provide businesses with the necessary funds to cover their immediate operational needs, such as inventory, payroll, or rent payments. Small business owners typically use these loans to fill the gaps in cash flow and maintain ongoing operations. For example, businesses with high seasonality or cyclical sales can benefit significantly from working capital financing.
Working capital financing can offer several advantages to business owners. They are simple to apply for and do not require equity transactions. Business owners retain complete control of their companies, even during urgent financing needs. Making regular payments on a working capital loan can also improve a business's credit score, making it easier to qualify for other financing options in the future.
The interest rates for working capital loans are generally expressed as an annual percentage rate (APR). For example, if a business takes out a working capital loan of $10,000 with an APR of 10%, the company will pay $1,000 in interest over a year.
It's essential to note that some funders may use a factor rate instead of an interest rate for working capital loans. The factor rate represents the total cost of borrowing and is applied to the entire loan amount upfront.
Invoice factoring, also known as accounts receivable financing, allows businesses to receive early payment on their outstanding invoices - a payment that a customer has yet to pay- from customers. Invoice financing can help companies to manage cash flow and access funds that may be tied up in unpaid invoices. Here's how invoice financing usually works:
A business submits outstanding invoices to a financing company or funder.
The financing company evaluates the invoices and the creditworthiness of the business's customers.
Based on the evaluation, the funder or financing company provides the business with a percentage of the invoice value. The sum received may vary from 70% to 85% of the invoice value.
The lender or financing company collects the outstanding invoice payments from the business's customers.
The lender holds the remaining amount (15-30%) as a reserve until the invoice is paid in full. Once the invoice is paid, the lender deducts their fees and interest and releases the remaining amount to the business.
The fees and interest charged by invoice financing can be higher than other forms of funding, so it's essential to compare different financing companies and carefully review the terms and conditions of the financing agreement. Invoice financing fees can include a discount rate, service fee, and interest charges, depending on the lender and the financing terms.
Revenue Based Financing
Revenue-based financing (formerly known as merchant cash advances) allows businesses to receive an upfront cash advance for a percentage of their future sales. They can be a quick and easy way for businesses to access capital, especially if they have poor credit or don't qualify for traditional bank loans. Here's how revenue-based financing typically works:
A business applies for a merchant cash advance from a funder providing information about their sales history and revenue.
The funder evaluates the business's creditworthiness and revenue potential. It determines the amount of the cash advance and the agreement terms.
If approved, the funder provides the business with a lump sum of cash upfront. It can range from $2,500 to $1 million, but most MCAs will fall between $5,000 to $500,000.
In exchange for the cash advance, the funder takes a percentage of the business's future sales, typically through a daily or weekly deduction from the business's business banking account.
The advance is typically paid back over several months to a year, depending on the terms of the agreement.
This type of financing is very risky to the funder. Therefore, the costs tend to reflect that. If you'd like to learn more about merchant cash advances, here's our guide about MCAs and how they work.
Line of Credit
A line of credit can be a flexible financing option for businesses that need access to capital on an ongoing basis, as it allows them to borrow as much or as little as they need when required and repay them over time. The amount of credit provided by a line of credit varies depending on the financing company and the borrower's creditworthiness. Typically, lines of credit 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: Funders typically require a minimum credit score of 600 to 650 to qualify for a line of credit. A higher credit score may result in more favorable terms and a higher credit limit.
Time in business: Most funders require that a company has been operating for at least six months to qualify for a line of credit. However, some funders may require a more extended operating history, such as two years or more.
Financial documentation: Funders may require financial documents such as tax returns, bank statements, and profit and loss statements to evaluate a business's financial health and ability to repay the credit line.
The cost of capital for a line of credit can be an interest rate, expressed as an annual percentage rate (APR). Because lines of credit provide access to funds as needed, you may borrow more than they can realistically repay, leading to potential financial strain. Before applying for a line of credit, businesses should ensure a strong credit history, sufficient cash flow, and a solid plan for using the credit line responsibly.
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.