What Is Short-term Business Loan?
A short-term business loan is a type of loan that provides businesses access to “quick cash” to cater to unforeseen or urgent financial situations. These loans usually start from $1000 and can go as high as $500,000. They are easier to obtain and have a short turnaround period; from a couple of months to a maximum of two years. They require less collateral than regular business loans—some lenders don’t require collateral—and are fairly easy to pay off. They also do not require a high credit score. So, businesses with low credit scores or bad credit could also benefit.
How Does Short-term Business Loan Work?
Short-term business loans are appealing because of the ease and speed of obtainment and the short turnaround time, but they could be tricky if you’re not paying attention. Short-term business loans actually have higher interest rates than long term loans, but you may not end up paying as much.
Interest charged on these loans may not be the only payment required. There may also be maintenance charges. Some banks and lenders charge an origination fee which could be as high as 2.5% of the amount borrowed. Luckily all these charges are reflected in an APR (annual percentage rate) which the percentage you would pay back expressed as interest on an annual basis. Some APRs could be as low as 10% while some could be as high as 60%.
How Are Short-term Business Loans Calculated?
Imagine obtaining a six-month loan of $20,000 with an APR of 40%. This means that you would have to pay back 40% of the loan as interest on a yearly basis. Because it is a short-term loan, banks would require you to pay weekly or daily. 40% divided by 12 is 3.33% per month, so for a 6-month loan, you would pay about $3,996 as interest i.e. $23,996 in total. If you are able to pay back the loan within 3 months then you would only pay an interest of $1,998.
Other institutions use factor rates. For a loan of $20,000 with a factor rate of 1.20, you would end up having to pay back $24,000.
The Pros and Cons of Short-term Business Loan
- Loans are easy to get.
- Loans are given relatively quickly.
- Minimal credit score required. Some as low as 500, some don’t require one.
- Little to no collateral required.
- Less interest accrued for shorter periods
- Higher interest rates for longer periods.
- Daily/weekly payments could be unsuitable for businesses that have uneven sales.
- The amount of capital that can be borrowed is limited.
- Some banks have penalties for early repayment.
How to Obtain a Short-term Business Loan?
There are traditional lenders like banks and other established institutions and there are online lenders with more relaxed requirements. You can apply to any one of your choice. You receive your loan once you meet their requirements.
What are the Requirements for Short-term Business Loan?
Requirements for short-term business loan include:
- A credit score: Some lenders overlook this but having a credit score, even a low one, is better than none.
- Business income tax returns.
- Operating history or projections if your business is new.
- Time in business: Some banks require businesses to have been in business for a period of time.
- Collateral: Some lenders overlook this, but providing collateral increases your chances of getting a loan.
Types of Short-term Business Loan
Secured loans are loans that require collateral to obtain, while unsecured loans do not require collateral. However, they are harder to get, have higher interest rates and more fees.