When banks were the only source of business funding, small business owners had just a few products to choose from. There was the traditional business term loan, a business line of credit, and that was about it. Today, however, there are many more options, such as the short-term business loan.
Like any other business financing program, short-term business loans have pros and cons. But depending on the requirements you are able to meet and the purpose of the funds, this could be exactly what you’re looking for. In this guide, we’ll go over how short-term business loans differ from other options, how to qualify for short-term business loans, and which financial institutions offer them.
What are Short-Term Business Loans?
A short-term business loan is essentially a business term loan with shorter terms, lower borrowing amounts, and slightly higher interest rates. While the terms for a business term loan typically run from 3-10 years, most short-term business loans are paid back in full within three to eighteen months. The repayment structure is usually identical to a business term loan: You are given a lump sum that is paid back via fixed or variable monthly payments. Some institutions require weekly or daily payments.
Since you have less time to pay off the loan, the requirements for short-term business loans are much easier to meet. And because short-term business loans are typically not distributed by banks, paperwork is minimal and the application process is very quick.
What are Short-Term Business Loans Used for?
Short-term business loans are designed for short-term investments, or covering business expenses over a short time frame. Popular functions include ordering inventory for an upcoming busy period, taking advantage of a sudden but lucrative opportunity, bridging gaps in cash flow, or paying off other outstanding debts.
These can be categorized as short-term investments because you’ll be compensated for the expense within a few weeks or months. Business term loans, on the other hand, are designed for larger investments that take longer to produce returns, like a marketing campaign or physical renovations.
How do you Qualify for Short-Term Business Loans?
Short-term business loans are distributed by online or alternative financial institutions. The minimum credit score is low, so other factors like cash flow and the nature of your investment could play a larger role in your approval. These factors could also determine your terms, interest rate and borrowing amount.
Below is a list of popular sources for short-term business loans along with their general requirements:
- OnDeck: 500+ personal credit score, $100,000+ annual revenue, 1+ year in business.
- Credibility Capital: 680+ personal credit score, $250,000+ annual revenue, 2+ years in business.
- StreetShares: 600+ personal credit score, $75,000+ annual revenue, 1+ year in business.
- United Capital Source: 500+ personal credit score, $100,000+ annual revenue, at least 6 months in business.
Documents Required For Short-Term Business Loans
As for paperwork, you’ll need:
- Driver’s License
- Voided Business Check
- Bank Statements
- Credit Score
- Business Tax Returns
- Credit Card Processing Statements
- Proof of Ownership
Here are the borrowing limits and average funding time (AFT) for these options:
- OnDeck: $5,000 to $500,000, 1-3 days.
- Credibility Capital: $50,000 to $400,000, Approx. 7 days.
- StreetShares: $2,000 to $250,000, 1- 5 days.
- United Capital Source: $10,000 – $10 million, 1-3 days.
Interest Rates And Terms
Here are the interest rates and terms for the options listed above:
- OnDeck: 1% to 99.8% APR, Repaid daily or weekly for 3 to 36 months.
- Credibility Capital: 10% to 25% APR, Repaid monthly for 1 to 3 years.
- StreetShares: 9% to 40% APR, Repaid monthly for 3 to 36 months.
- United Capital Source: Interest rates start at 9%, Repaid daily, weekly or monthly for 3+ months.
Why Are Short-Term Business Loans So Expensive?
As you can see, short-term business loans are significantly more expensive than most other options. There are several reasons for the high cost, beginning with the speed of the application process. This level of convenience comes with a price. Financial institutions take much less time than usual to make sure you are fully capable of paying off the debt. Charging high interest rates ensures they will get their money back within a short time frame.
Alternative Options For Short-Term Financing
The disadvantages of short-term business loans may be too risky for you. If so, it’s perfectly understandable to consider other options, as short-term business loans are not the only solution for short-term investments. The following options may turn out to be cheaper and/or easier to pay back:
Business Line of Credit
You are given a credit line that you can borrow from at any time, like a credit card. But unlike a credit card, you only have to make payments when you borrow. So, if you borrow nothing for one month, your balance is zero. Interest depends on how long it takes to pay off the total balance. If your business line of credit is revolving (which they are in most cases), you can keep borrowing as long as you pay off the amount you just borrowed. Once you pay off the total balance, the credit line replenishes.
A business line of credit is ideal for businesses that frequently deal with dips in revenue and unforeseen expenses. Instead of applying for business loans over and over again, you can just keep borrowing from your credit line. The requirements for approval, however, are not as loose as a short-term business loan.
This is why it is often recommended to obtain a business line of credit before you actually need the money. When that time comes, you won’t have to worry about meeting typical business loan requirements with rocky cash flow or slow revenue.
Working Capital Loan
Working capital loans and short-term business loans are very similar. The amount is directly based on the monthly costs of running your business, which can be less than the minimum borrowing amount for a short-term business loan. You can pay off the debt in as little as four months, and payments can be collected daily, weekly, or monthly.
Accounts Receivable Factoring
This option is designed for businesses that revolve around invoices. A common cause for cash flow problems in such businesses is late-paying customers, or allowing all customers to submit payments at the end of the month. With accounts receivable factoring, the financial institution purchases the unpaid invoice for a discount price. Instead of getting paid in one or two months, you get paid in as little as a few business days.
It is also now the institution’s responsibility to collect the payment from your customer. Once the payment is collected, the institution pays you the remainder from the first payment, minus a percentage. Accounts receivable factoring is among the easiest business financing options to qualify for because approval depends on the creditworthiness of your customer, not you.
Are Short-Term Business Loans Worth the Price?
These alternatives may be cheaper than a short-term business loan but that is not a reason to choose an option that doesn’t make sense for your circumstances. Moderately expensive debt is manageable. Letting cash flow issues or lucrative opportunities go ignored, on the other hand, could prove hazardous.
Proving that you can pay back a short-term business loan will also show a lot of institutions that you are capable of handling larger amounts, which typically come with more convenient terms. Access to cash is indispensable for today’s small businesses. So, if you need extra working capital now, it might be best to pursue what you can qualify for rather than wait for something else.