What is a short-term business loan and how does it work?

If you like to keep your business agile, you might have steered clear of business loans. You don’t want to be dealing with debt payments years — maybe even decades — down the road.

But if a lump sum of money could make a difference for your business, a long-term loan isn’t your only option. With short-term business loans, you can get the cash you need now and often be done with repayments in 18 months or less.

Before exploring the best short-term business loans, there are a few things you should know about this financing option.

What are short-term business loans?

Short-term small business loans are a financial resource for companies that need extra cash. These loans have shorter terms which means you’ll get out of debt sooner. However, that setup also results in high monthly payments, and these loans also tend to have high interest rates.

A quick application process combined with easier requirements than long-term loans makes this financial product compelling for many business owners. Some businesses that can’t get approved for long-term loans may have better luck with short-term business loans.

How does a short-term business loan work?

Short-term small business loans work a lot like other types of loans. The lender gives you a lump sum of money, usually in exchange for some sort of business collateral (unless you take out an unsecured loan, which would usually translate to a higher interest rate).

Like other loans, you repay what you borrow in the schedule laid out by the terms of your loan. Unlike other loans, that timeline is brief. Usually, short-term business loans have terms of 18 months or less. Depending on the type of short-term business loan and lender, you may have to make daily or weekly repayments to repay in that short time.

Online lenders primarily offer these loans. They can usually process your application quickly (within 24 hours in some cases). Once approved, money usually hits your account the same day. But, be prepared for higher short-term business loan interest rates in exchange for that expediency, as many short-term loans use factor rates instead of interest rates.

Short-term business loans vs. long-term business loans

Long-term business loans come with longer repayment terms, usually anywhere from seven to 25 years. Rates are usually much lower compared to short-term business loans.

That longer repayment schedule can help to facilitate a larger loan, plus it can mean making less frequent payments and keeping those monthly payments down. With a short-term loan, you usually make payments weekly or daily, with interest expressed as a factor rate. This can make the true cost of a short-term loan more expensive than a longer-term loan.

Both short-term and long-term business loans have options that allow you to use the funds for a variety of uses. Make sure you check your loan agreement to understand exactly how you can use a short-term loan.

Reasons to take out a short-term business loan

The reasons you might consider a short-term business loan are probably as unique as your business itself. Here are a few common use cases for short-term business loans:

• Dealing with emergency expenses. Maybe a key piece of equipment just broke, or a natural disaster impacted your office. To get the money you need to handle the unexpected, fast short-term business loans can come to the rescue.
• Covering seasonal cash flow dips. Does your business have boom seasons followed by leaner times? Short-term small business loans might be worth exploring if you need to weather a seasonal slump.
• Seizing a business opportunity. If bringing on headcount could help you service an exciting new client or making a big inventory purchase now could help you land a sizable discount, you might need a lump sum of liquid capital your business doesn’t have. With a short-term loan, you can get that cash in hand to lean into the growth opportunity.
• Getting financing with bad credit. Because this type of financing usually comes with looser eligibility requirements, it can be an option for a bad credit business loan.

Bottom line

Short-term business loans can offer business owners funding to bridge a brief gap in their cash flow. You’ll generally get the money fast, but you’ll also need to repay it quickly. Evaluate your cash flow and make sure you can keep up with the rapid repayment terms that come with these types of loans.

If the repayment periods for short-term loans are too quick for you, review the alternatives to see what other options are available. You can also use a business loan calculator to determine what repayment terms best fit your budget.

Frequently asked questions

• Who should get a short-term business loan?

  These loans can be a good option for owners who need a lump sum of cash now but don’t want to be saddled with long-term debt. They can also be a good option for businesses that wouldn’t qualify for long-term business loans, like new startups and companies with bad credit.

• How long is a short-term business loan?

  These loans typically have a repayment term of three to 18 months, but some short-term loan lenders offer repayment periods of up to 24 months.

• Why would a business need a short-term loan?

  A short-term business loan could help you deal with cash flow issues, seize an unexpected business opportunity or deal with an emergency.