Short-Term Business Loans: 5 Things You Must Know Before You Borrow
There comes a time in the life of every small business when a quick short-term business loan can make the difference between business growth and business failure. Whether you need an infusion of cash to buy equipment or cover an unexpected cash flow shortage so you can make payroll, a short-term business loan provides the working capital your company needs to stay above water.
In general, short-term loans for businesses are an excellent option for business owners who cannot get approval for a regular business loan. For example, the lender may require collateral the small business does not have, or the company might still be in the startup stage. Lenders are more likely to approve short-term business loans because the amount borrowed is typically lower (no more than $100,000), and the lending period is shorter (six to 18 months). Also, there might not be a specific payment schedule, so there is some flexibility in the terms.
Here are five things you should know about short-term business loans before you take the plunge.
The Give and Take of Interest Rates
Because a short-term business loan is short-term, meaning it must be paid back quicker than a long-term business loan, you can expect the interest rates to be on the higher end. Interest rates vary depending on the lender, your business’s credit rating, and whether you are offered a fixed or variable rate loan. Small business short-term loans typically have fixed rates ranging from 8%-80%, with the lower rates going to less risky businesses. Lenders think it’s riskier to lend money to small companies with low credit ratings, insufficient revenue, and less time in business and therefore charge them higher interest rates.
However, even with the higher interest rate, a short-term business loan will likely cost you less overall because the loan term is so much shorter. Paying interest for only a year costs you much less than paying interest over a more extended time period.
The Need for Speed
More often than not, small companies looking for short-term business loans need the money in a hurry. Perhaps the office space next door opens up, and suddenly there’s a chance to expand. Or the inventory you’ve been waiting for becomes available, but you’re a little cash-poor. In these cases, speed is of the essence.
The good news is getting a quick business loan or even a same-day business loan is much easier with a short-term business loan. Short-term unsecured business loans tend to be processed quickly because the borrower doesn’t need to come up with collateral to back up the loan. The more prepared you are for the application, the quicker you can apply and have your application reviewed.
Although documentation criteria depend on the lender, typically, the borrower needs to provide:
- Business verification such as business license, incorporation documents, etc.
- Business bank statements
- Business tax returns
- Financial statements such as balance sheet and income statement
The lender may also check the business’s credit score and the personal credit scores of the borrower. Using online lenders, the process can be completed all online, and the money deposited into the business’s bank account within a few days.
Business Installment Loan
When choosing a short-term business loan, one factor that can help you make a decision is whether the small business loan is installment or revolving? In other words, will the short-term loan for your small business require monthly installment payments? In most cases, the answer is yes. After you’ve received loan approval, you will receive the entire loan amount upfront and then pay back the loan in monthly installments over the agreed-upon loan period. In fixed-rate loans, you’ll make the same payment every month. Also, find out if there any penalties for early payoff. There may not be additional penalties in most cases, but you will likely still have to pay the entire interest due.
Working Capital Business Line of Credit
A working capital line of credit is a type of short-term business loan that “never runs out.” A business line of credit is a revolving line. Once the lender approves the loan, it is deposited into your bank account to use whenever you need it. You always have access to the total amount, but you don’t need to take out money or pay it back until you need to use it.
Borrowers can take a “draw” when needed, essentially giving their businesses loan amounts of their choosing. Then the money is paid back, making it available again for another draw the next time it is necessary. Borrowers do not have to apply for another loan as long as the amount borrowed stays within the credit limit. The money remains in the borrower’s account (think of it as an emergency fund), and interest is only applied on the amount of the draw.
Depending on the terms of the loan, lines of credit could have a variable interest rate, follow the current prime interest rate or charge a fee based on the amount of funds used. Plus, you may have a time limit in which to repay the draw. Also, the lender may establish an initial draw phase where you can borrow and pay back the draw at your own discretion. At some point, the line of credit will enter a repayment phase. During the repayment phase, draws are not available until the entire loan has been repaid.
Unsecured Business Line of Credit
Once you decide on a business line of credit, be aware most banks only offer secured lines of credit, which means the loan funds must be backed up by collateral, such as your property or other business assets. An unsecured business line of credit is one type of short-term small business loan that doesn’t require collateral or personal guarantees for approval. Here at Financing Solutions, we offer many unsecured options ready to help your business get over the typical cash flow humps all companies face.
Our quick and easy application takes only minutes to complete, has no setup costs, and the money is wired directly to your bank account. Contact us today to make sure your business is covered in case of financial emergencies or opportunities.