The flow of business is unpredictable. No matter much planning you make, your business will encounter unexpected financial hiccups. Even a highly-organized business owner knows that there will be unforeseen fees and payments that they’ll have to deal with. Whether it’s broken equipment that needs repair or a shortage in working capital to pay your employees, you can never predict when you’ll need some extra cash. That’s why you need to be ready for the inevitable. When it comes, you should get a short-term business loan.
What Short-term Small Business Loan?
A short-term loan is a financial strategy that involves lending money that’s intended to be paid. However, unlike a regular loan, a short-term loan is settled much faster. Long-term loans from a lender or traditional bank can take several years to pay off. On the other hand, short-term business loans are usually settled within months. Terms for repayment will vary; however, most short- term loans last for a year or less.
In most cases, short-term business loans are often utilized to help smaller business owners cover temporary cash flow trouble. Seasonal businesses, in particular, are often prone to inconsistent cash flow since they make a large portion of their yearly revenue in shorter periods (such as winter or summer). For that matter, these businesses may benefit from a short-term business loan that provides cash upfront without accumulating long-term debt. Traditional financing options like SBA loans or bank loans typically gear for long-term repayments.
Types of Short-Term Small Business Loans
Now that you know the concept of short-term loans, the next thing you need to learn is its various types. Note that short-term loans are not the same. Basically, any minor loan that comes with a short repayment term technically falls under the category of ‘short-term loan.’ However, there are other types of financing options that are more suitable for short-term business funding. With that said, here are the different types of short-term business loans:
Merchant Cash Advance Loan
A merchant cash advance is a type of short-term loan option that sees the borrower repaying with a percentage of credit card sales. This type of loan is ideal for a lot of business owners since the remittances depend entirely on the business’ sales. In addition, interest rates for merchant cash advance are steeper than other small-term loan options. This high price can be a problem for businesses that are really struggling with their cash flow.
The flow of business is unpredictable. No matter much planning you make, your business will encounter unexpected financial hiccups. Even a highly-organized business owner knows that there will be unforeseen fees and payments that they’ll have to deal with. Whether it’s broken equipment that needs repair or a shortage in working capital to pay your employees, you can never predict when you’ll need some extra cash. That’s why you need to be ready for the inevitable. When it comes, you should get a short-term business loan.
What Short-term Small Business Loan?
A short-term loan is a financial strategy that involves lending money that’s intended to be paid. However, unlike a regular loan, a short-term loan is settled much faster. Long-term loans from a lender or traditional bank can take several years to pay off. On the other hand, short-term business loans are usually settled within months. Terms for repayment will vary; however, most short- term loans last for a year or less.
In most cases, short-term business loans are often utilized to help smaller business owners cover temporary cash flow trouble. Seasonal businesses, in particular, are often prone to inconsistent cash flow since they make a large portion of their yearly revenue in shorter periods (such as winter or summer). For that matter, these businesses may benefit from a short-term business loan that provides cash upfront without accumulating long-term debt. Traditional financing options like SBA loans or bank loans typically gear for long-term repayments.
Types of Short-Term Small Business Loans
Now that you know the concept of short-term loans, the next thing you need to learn is its various types. Note that short-term loans are not the same. Basically, any minor loan that comes with a short repayment term technically falls under the category of ‘short-term loan.’ However, there are other types of financing options that are more suitable for short-term business funding. With that said, here are the different types of short-term business loans:
Merchant Cash Advance Loan
A merchant cash advance is a type of short-term loan option that sees the borrower repaying with a percentage of credit card sales. This type of loan is ideal for a lot of business owners since the remittances depend entirely on the business’ sales. In addition, interest rates for merchant cash advance are steeper than other small-term loan options. This high price can be a problem for businesses that are really struggling with their cash flow.
Working Capital Loan
A working capital loan is a type of term loan that is usually smaller wither a shorter repayment term compared to long-term loans. This loan requires a consistent monthly payment, which is ideal if you want to know your exact loan amount and monthly payment amount. On the other hand, a working capital loan is not ideal if your business has unpredictable revenue. It’s also not for business owners who are unsure if they are able to make the monthly payments.
Invoice Financing
Invoice financing is a short-term loan that’s ideal for businesses that have the time between providing a service and collecting payment for it. For instance, if your business requires payment from its customers within a 30-day period, invoice financing can give you the upfront capital you need to get through the month while buying more materials for your next project.
Business Line of Credit
Finally, this type of short-term loan functions more like a credit card. It’s ideal if you’re unsure of how much capital you’ll need to run your business. So, instead of a lump sum for your capital, a business line of credit will allow you to use only the exact amount of cash you need and pay back the money that you will use. Also called ‘flexible financing,’ business line of credit is great for business owners who need to supplement surprise expenses like an abrupt spike in product orders.
Advantages & Disadvantages of Short-Term Small Business Loans
A short-term small business loan can help any struggling business survive a difficult period or seasonal slump. But while that’s a good thing, we also need to acknowledge the fact that it also comes with a few disadvantages. With that said, here are the ups and downs that you should know about short-term business loans.
Advantages of Short-Term Business Loans
A short-term business loan proves to be a faster and easier option than a regular business loan. Applying for a business loan via a bank will involve going through large paperwork and waiting weeks or months for approval. When you’re facing an unexpected expense, you can’t wait for weeks to get the money you need. That makes traditional business loans not a viable option during these situations.
When you look at small-term business loans, lenders typically have fewer requirements, making it much easier for any business to receive immediate financing. Short-term loans are also helpful if you don’t have a great credit history or a low credit score.
A short-term loan is also ideal in scenarios where you’ll need to borrow a relatively small amount of money. In most cases, small business owners often get turned down for traditional business loans simply because they’re not seeking loans that are large enough for the lender to generate profit.
A short-term loan is also ideal for short-term businesses. Since many business owners only need funding to overcome temporary financial difficulties, they don’t like the thought of being stuck paying off a loan after years have passed since the original need for that funding.
Furthermore, short-term business loans can also aid in improving your business’s overall credit score. As you progress towards paying off your short-term loan, your regular payments will automatically reflect on your credit score. Once you improve your credit score, your business will qualify for larger business loans with better repayment terms.
Disadvantages of Short-Term Business Loans
The most significant disadvantage of short-term business loans is the higher interest rates compared to regular long-term business loans. Since the loans have shorter repayment terms, you’ll need to make larger and more frequent payments to settle your account. There are even cases where business owners need to pay on a daily or even weekly basis.
While collateral is usually not required, for short-term business loans, some lenders will ask for one. They usually ask for collateral for loans that involve buying equipment or other collateral loans.
Uses for Short-Term Business Loans
Short-term business loans are useful for a lot of purposes and applications. You can upgrade broken-down equipment, improve inventory, pay your employees, handle emergency repairs, and other needs. Since the nature of a short-term loan is brief, it’s best for dealing with emergency expenses, temporary cash flow disruptions, prepping for a seasonal business spike, and for short-term business expansion needs.
On the flip side, a short-term loan is not preferable for larger, more significant financing needs like acquiring another business or moving to a bigger office. These purposes are intended for long-term loans.
How to Apply for a Short-term Business Loan?
Applying for a short-term business loan is more straightforward than a regular business loan. If you are in Australia, applying for small business loan has never been easier. The application process will vary depending on the lender you are applying to. If you choose an online lender, you’ll likely be able to complete the entire process online.
As a loan applicant, you’ll need to provide things like proof of business ownership, bank statements, profit and loss statements, tax returns, and a copy of any valid ID (usually your driver’s license). The lender will also check both your business and personal credit score. While your business credit score will be a factor, lenders who ask for them will often place lesser emphasis on it.
In some cases, and depending on the type of small-term business loan you’re applying for, some lenders will ask you to provide collateral. If you get approval for your short-term business loan, then you will receive the funds within one to two business days. In most cases, it will be in the form of a direct deposit to your bank account.
Conclusion
If your business is in dire need of some immediate funding to get by a difficult period, you can always rely on short-term small business to save the day. We hope you’ve learned a lot of valuable information with regards to short-term business loans. Make sure you use this article as a resource if you want to refresh your knowledge with short-term business loans.