Every small business owner is constantly working towards the big picture but it’s important not to lose sight of the short-term needs of your small business, as there won’t be a long-term if you get tripped up by day-to-day obstacles. A short-term small business loan can help your business overcome those obstacles.
What is a Short-Term Business Loan?
A short-term business loan is a loan with a short repayment period, typically 18 months or less. With this type of financing, you can access funds within a week of submitting your loan application.
Why Should You Apply for a Short-Term Business Loan?
There may be a lot of reasons why you, as a small business owner, should apply for such a loan. We have made a list of a few of them below:
Your Working Capital Ratio is Too Low
Your working capital is a way to determine your ability to meet financial obligations over the next year. Your current assets include cash and cash equivalents, accounts receivable, prepaid expenses, and inventory. Accounts payable, accrued expenses, notes payable, and taxes payable are a few current liabilities. The ideal working capital ratio (current assets / current liabilities) is widely considered to be between 1.5 and 2. If your working capital ratio is below this range, you may need additional funds to avoid financial trouble.
You Want to Invest in Marketing
An excellent product or service won’t generate revenue if nobody knows it exists. The good news is you don’t need a massive budget to advertise your small business. You can hire an agency to build a website and create a lot of SEO content. With this strategy, you could generate leads months or years after your initial investment. You could also invest in traditional forms of advertising, such as television and print. You may see quicker results, but the upfront investment is often on the higher end.
You Need a New Piece of Equipment
As a small business owner, there may come a day when something unexpectedly breaks down, and you need a new piece of equipment immediately. In an urgent situation, you should ask a business lender how long it takes to get approval and funding for a loan. You could be stuck waiting for weeks or months with a traditional bank or credit union.
Types of Short-Term Loans for Small Businesses
So, you’ve decided your small business needs a short-term loan… or you want to be prepared if/when you need this type of small business funding. You have several loan options, but a few of these options aren’t technically “loans” – they function as short-term small business financing solutions.
Term Loan
A term loan provides the borrower with upfront cash to be paid back on a set schedule at a variable or fixed interest rate. You can get a term loan from a traditional lender or online lender. You can use a term loan for various short-term business needs, including equipment, inventory, and seasonal staff, as well as long-term needs, such as real estate.
You can get a term loan with a payment plan ranging from 1 year to as long as 25+ years with some lenders, so this isn’t exclusively a short-term financing option. To qualify for a term loan with an online lender, you typically need annual revenue above $250k, a 660+ credit score, and at least 18 months in business.
Business Credit Card
A business credit card allows you to finance your business’s short-term needs and, at the same time, build your business’s credit history. You may not want to use a business credit card if you won’t be able to pay off your balance for a few months, but if you expect to have the money by the end of your billing cycle, you should consider using this financing option.
With a business credit card, you may get perks such as cash back, sign-up bonuses, travel rewards, and more. The Capital One Spark Cash for Business card, Chase Ink Business Preferred card, and American Express Business Gold card are a few of the best business credit cards.
Business Line of Credit
A business line of credit has much in common with a business credit card. This type of financing allows small business owners to access money up to a certain limit for general business expenses. There is no lump-sum disbursement; you only borrow what you need when the money is needed and only pay interest on the amounts borrowed. A business line of credit usually has a variable interest rate.
Merchant Cash Advance
A merchant cash advance (MCA) provides a lump sum to a small business owner to be paid back based on future sales. The amount of money to be repaid is calculated by taking the lump sum and multiplying it by a factor rate (typically somewhere between 1.2 and 1.5). The payments can be based on a percentage of your estimated future sales or actual sales.
It’s not hard to qualify for an MCA, as a credit score of 525-550 is often sufficient. But the annual percentage rate (APR) is on the higher end, so you might want to consider other types of short-term loans if you have a good credit score.
Benefits of Short Term Business Loans
There are some major benefits of short term loans that small businesses can take advantage of. Here are a few:
- Easier application and approval:with a longer-term loan, the lender must be confident in the borrower’s long-term future. In addition, the loan amounts tend to be higher. So, the lender must do their due diligence and only accept the most creditworthy small business owners. With a short-term loan, the lender recoups the funds quickly, and loan amounts tend to be lower, so an easy loan application process and an easy approval process are common.
- Fast funding:the easier application and approval processes allow the borrower to get fast funding in many cases.
- Potential for low interest rate:it’s possible to get a low interest rate with certain types of short-term loans, such as term loans.
Disadvantages of Short Term Business Loans
While the benefits are attractive, small businesses should be aware of the drawbacks too:
- Frequent payments:you may have to make daily or weekly payments instead of monthly payments on a short-term financing option. The repayment terms can be an issue if you have a very short-term (7-10 day) cash flow problem.
- Easy to overuse:the cost appears inconsequential with certain types of short-term financing, such as invoice factoring and invoice financing. So, it’s easy to use them a lot. The costs can add up to a large amount over time, though.
- Potential for high interest rate: yes, the interest rate is a pro and a con. You could pay a high “equivalent” annualized interest rate on a merchant cash advance, invoice factoring, and invoice financing.
Conclusion
A single short-term loan isn’t likely to make or break your small business, but it’s possible to turn to this type of small business funding option several times over the years. It’s essential to use the right type of loan for each situation your small business faces.
