When you own a small business, an urgent need for cash is a common problem. You might need to hire new employees, purchase new inventory, or pursue a new opportunity to grow. Short-term business loans are a common solution that allow you to cover new expenses while your working capital covers other operating expenses.
But what is a short-term business loan? And – specifically – how do short-term business loans work as a growth resource?
In a pinch, short-term business loans can help you accomplish anything. You can use this cash to cover immediate expenses, including sudden challenges and working capital shortages, but especially new opportunities.
Looking to solve a challenge or take your business to the next level? Continue reading for what to know about short-term loans and, more importantly, how to leverage them to increase your profitability and grow to greatness.
What Are Short-Term Business Loans?
Short-term business loans are financing options that help your business cover working capital needs, with a repayment term of 18 months or less. Borrowers repay the principal amount of the loan, plus interest, through daily or weekly payments to their lender.
This type of financing generally has lower funding amounts than long-term loans. That being said, there are exceptions, and you can find the financing you need by applying with multiple lending organizations – or through a trusted marketplace of lenders.
How do short-term business loans work? When you receive a short-term loan, you’ll get a lump sum of cash deposited into your bank account. Throughout the repayment period, you’ll be responsible for making payments, which are based on a predetermined agreement.
At a certain stage, all businesses encounter a need for additional cash. Between problems that your business might encounter, along with opportunities to take things to the next level, getting a short-term loan can help you boost revenue in the long term.
There are many different types of short-term business loans. You can secure term loans, revenue-based financing, equipment loans, and inventory loans with shorter repayment terms.
At first glance, paying back the loan over a shorter period of time can add stress to your budget. But in reality, short-term business loans may be the best tool at your disposal to capitalize on immediate needs that drive revenue.
By nature of the shorter term length, short-term loans tend to have lower funding amounts than long-term loans. That being said, you can normally still find the financing you need by applying through a trusted marketplace.
Because the amount is lower, you generally won’t have to worry about overborrowing or overpaying, like you might with a larger sum. Instead, you can ensure that you’re taking only the funds you need to accomplish your goal and start driving growth. The shorter payback period also means that there is less time for interest to accrue.
With cash in hand, you can get started spending on hiring, inventory, or any other expense you might face.
Benefits and Disadvantages of Short-Term Loans
Short-term financing isn’t best for every business. For some, long-term loans will better serve their needs. Let’s explore the advantages and drawbacks of short-term loans.
Benefits
- Fast funding
- Shorter repayment periods
- Less restrictive eligibility requirements
- Lump sum of capital to invest in your business
Disadvantages
- Higher interest rates
- Frequent payments
- Lower funding amounts
- Not as flexible as business lines of credit
What are short-term funds used for? Short-term financing is great for businesses that need to take advantage of an opportunity or solve a challenge quickly – if the repayment is managed correctly. The frequent payment schedule can become overwhelming if you aren’t on top of your payments, which can lead to numerous financial consequences and make it difficult to secure financing in the future.
However, that’s not to deter you from leveraging this type of financing to grow your business. Short-term loans are and will continue to be, a powerful resource for investing in growth. From term loans and inventory financing to inventory loans and equipment financing, each of the types of short-term business loans can help businesses solve challenges and grow. You can use them for nearly any business purpose, and if you manage the repayment responsibly, your business can look completely different at the end of your term.
How Short Can Business Loan Terms Be?
When it comes to moving forward with a loan program, the term length is an important factor. After all, this is the period of time during which you’ll be held responsible for repaying the loan.
Depending on where you apply, you can find short-term business loans that range from as short as 6 months, and as long as a year. Loan programs that last longer than this fall into the long-term loan category.
Some of the short-term financing options you can qualify for are:
- Small business loans
- Business lines of credit
- Merchant cash advances (which are technically not loans but another type of financing)
- Revenue-Based Financing
Difference Between Short-Term and Long-Term Loans
During the search for financing, most small business owners seek out loans with longer terms. But in reality, the decision between short- and long-term loans should take your needs and goals into consideration. Before moving forward with a decision, you should speak to an expert who can advise you on the best choice for your business.
| Type of Financing | Description |
| Short-Term Loans | Short-term loans generally have a payback period that lasts anywhere from 6 months to 1 year. Long-term loans, on the other hand, can last anywhere from 1 year to 10 years.
But, the difference between these types of loans is less about the term length and more about how you plan to use the extra cash while growing your business. Understanding when to use short-term funds in business will help you determine which option is right for you. If you need cash to finance a new opportunity by hiring new employees, purchasing extra inventory, ramping up marketing, or taking on a new project, then a short-term business loan may make the most sense. These expenses drive short-term revenue, meaning you’ll soon have the cash you need to repay the loan rather than let interest accrue. |
| Long-Term Loans | Long-term business loans, on the other hand, are better suited for expenses that may take your business to the next level, but not right away. A term loan could strategically cover growth costs like opening a new location, purchasing real estate, acquiring another business, and other necessary costs, like building maintenance.
Many business owners apply for SBA loans, which usually allow for extended term lengths. Another important factor to consider is the speed between application and funding. Because lenders aren’t researching your business as thoroughly, you can normally qualify for short-term loans in a faster period of time. Long-term loans may take slightly longer to qualify for, but still much faster than a bank. When you apply through a trusted marketplace, you can usually still receive your financing in a reasonable amount of time. |
Each option has unique benefits for specific circumstances. Some financing products, like term loans, can be long or short-term, whereas equipment financing is generally a long-term solution. If you need one option over the other to take full advantage of your opportunity, just ask our team, and we’ll leverage our 75+ lender marketplace to find you the best options.
How Can I Qualify for a Short-Term Business Loan?
While all short-term business loans have term lengths lasting from 6 months to 1 year, they vary wildly when it comes to interest rates, loan amounts, and more.
Because not all short-term business loans are the same, the qualifications aren’t exactly universal. Lenders will evaluate your business differently based on their own requirements and the qualifications for their specific programs.
Different lenders may have different qualifications, but most will examine the same few key indicators, like:
- Business and personal credit score: This tells the lender about your previous financial commitments. While this is an important number, a high credit score is no longer the make-or-break factor it once was for all lenders and still is for banks. Most FinTech and online lenders will have options regardless of your credit score, even with bad credit.
- Time in business: Before choosing to lend to your business, lenders will want to ensure that your business has been around long enough to guarantee you can repay the loan. As a baseline requirement, most lenders will require you to be in business for at least 6 months.
- Annual revenue: Unlike your credit score, your annual sales give the lender a more vivid idea of how your business is performing. To qualify for options, you normally need at least $120K in annual revenue.
Putting collateral down may help you negotiate better terms for business financing, but you can also find unsecured options without collateral.
Most lenders, however, will require a personal guarantee. This simply holds you accountable for the costs of the loan in the event your business defaults.
Understanding your eligibility is the first step in answering the popular question, “How to get a short-term business loan?” Next, you’ll need to apply with lenders, review their offers, and select the one that best fits your business and where it’s headed.
When to Use Short-Term Funds in Business
Knowing when to use short-term funds in business is half the battle. Basically, short-term financing is used for short-term projects and needs. If you’ll see a return on your investment within the repayment period on your loan, it’s worthwhile to research lenders and see what you qualify for.
Here are a few situations where a business could benefit from a short-term loan:
- Preparing for a busy season, like a holiday
- Equipment purchases, where the equipment will increase your business’s profitability
- Liquidity shortages
- Hiring staff
- Launching a marketing campaign
- Purchasing inventory in bulk
- Starting a project with upfront costs
Short-term financing is best for businesses that need to plug a challenge or take advantage of an opportunity quickly. It’s a great way to increase purchasing power, streamline cash flow, and add working capital for any business purpose.
Is a Short-Term Business Loan Right for My Business?
Short-term business loans work much like any other business loan – just on a shorter schedule.
Once you’ve found a lender and gone through the application process, you receive a lump sum of capital in your bank account to manage throughout the term of your loan. You’ll make regular payments to your lender on the predetermined schedule included in your contract. Once you pay off the total amount plus interest, you’ll have no debt attached to your name.
You might think that paying back the loan over a shorter period can add stress to your budget, but short-term business loans may be the best tool to capitalize on immediate needs that drive revenue.
By nature of the shorter term length, short-term loans tend to have lower funding amounts than long-term loans. That being said, you can normally still find the financing you need by applying through a trusted marketplace.
Because the amount is lower, you generally won’t have to worry about overborrowing or overpaying, like you might with a larger sum. Instead, you can ensure that you’re taking only the funds you need to accomplish your goal and start driving growth. The shorter payback period also means that there is less time for interest to accrue.
With cash in hand, you can get started spending on hiring, inventory, or any other expense you might face.
Get Started Growing Your Business Today!
Let’s recap – What are short-term loans used for? Business purposes where you’ll see a return on your investment within the repayment period or the revenue generated from your investment will cover the cost of financing. This is a careful balance that, in most cases, can only be achieved by working with the right lender.
At National, we can find the best short-term business loan options available on the market for you through our 75+ lender marketplace. You can stop wondering, “How to get a short-term business loan” and start growing your business. Applying is quick, simple, and easy, and you can submit your financials without any paperwork.
One of our Business Financing Advisors will guide you through the process and answer any of your questions. Through our lightning-fast process, you could receive your options in minutes and funding in as little as a few hours.
Ready to get started? Apply now to learn your options!
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Joseph Camberato
Joe Camberato is the CEO and Founder of National Business Capital. Beginning in 2007 out of a spare bedroom, Joe and his team have financed $2+ billion through more than 27,000 transactions for businesses nationwide. He’s made it his calling to deliver the educational and financial resources businesses need to thrive.
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