When to consider a short-term business loan

When you run your own business, there may come times when you may need cash quickly to cover an immediate need. A short-term business loan can help by providing you with funds while keeping the repayment timeline short so that you get back out of debt quickly. Yet short-term business loans come with some disadvantages, such as the lender charging high fees and interest rates.

We’ll break down common situations when a short-term business loan makes sense to get and the pros and cons to consider.

Should I get a short-term business loan?

Short-term business loans make sense for businesses that need a loan quickly and can repay the loan within a relatively short time, such as within 24 months. These loans may also work well if you can’t qualify for other business loan options, such as long-term loans. You might consider a short-term business loan in these situations:

Cover emergency expenses

In some situations, your company could face a financial emergency and need to come up with quick funds. For example, if a key piece of equipment breaks, you must get it repaired to keep your company running. Getting a short-term business loan to cover that expense makes sense.

A business line of credit or term loan is a good source of funds to help cover emergencies. You’ll likely need to work with an alternative lender for fast approval and funding. They tend to specialize in providing loans in as little as 24 hours, which is much faster than loans typically offered by banks and credit unions.

Fill gaps in cash flow

One of the most important things for business owners is to keep track of their cash flow. Businesses wondering if they should get a short-term business loan may want to start by evaluating their revenue and expenses. Your company can be profitable, but if income doesn’t align with expenses, you could find yourself with bills coming due and no money to pay them.

Seasonal businesses often face this issue, with lots of money coming in during busy seasons and limited income during the off-season.

The best business lines of credit offer a quick and flexible source of funds to cover short-term cash flow issues. The benefit is that you can draw funds whenever needed and only pay interest on your outstanding balance. Just watch out for maintenance fees or draw fees for withdrawing money from the line of credit. The overall cost of the loan could rise significantly based on these extra charges.

If you can’t qualify for a line of credit, some businesses rely on other types of financing to help cover cash flow issues. There are many types of loans that are accessible to business owners with bad credit but will carry higher rates and fees. These include:

• Merchant cash advances
• Invoice financing
• Invoice factoring

business owners with bad credit but will carry higher rates and fees. These include:

• Merchant cash advances
• Invoice financing
• Invoice factoring

Purchase inventory

You might need help getting funds to buy inventory if you run a retail store. Inventory financing loans are specially designed to help in these situations. The inventory itself serves as business collateral for the loan, making approval easier.

You might need help getting funds to buy inventory if you run a retail or online store for a product. Keeping inventory on hand is essential to fulfilling your customers’ orders quickly and efficiently. Inventory financing loans are specially designed to provide a line of credit or loan that your business can use to purchase inventory. The inventory itself serves as business collateral for the loan, making the loan less risky for the lender and improving your chances of approval.

Lenders may only offer anywhere from 20 percent to 80 percent of the inventory’s total value, limiting how much you can get for a loan. It can also be difficult to find a lender that offers inventory financing, though online lenders like SMB Compass offer this loan. Term loans and lines of credit are good alternatives to consider.

Time-sensitive business opportunity

Sometimes, your company might find a time-sensitive opportunity that could help the business grow. For example, if a business in your industry goes on the market, you could acquire the business to expand your footprint and sales.

In this scenario, speed and loan amount are the most important factors, so you’ll want to prioritize lenders that will offer the amount you need with a short funding timeline. You’ll want to research lenders thoroughly since many short-term lenders cap loan amounts at $500,000 or less. Despite this, some lenders like Fora Financial offer loans into the millions of dollars. For purchasing real estate, you’ll likely need a real estate loan, which tends to offer longer repayment terms up to 25 years.

Some businesses may want to consider a working capital loan, which helps cover your business’s day-to-day operations, allowing you to take advantage of the time-sensitive opportunity.

Pros and cons of short-term business loans

Although short-term loans can help with emergency expenses or time-sensitive business opportunities, they aren’t the best fit for every business. Before agreeing to a short-term business loan, it’s important to review the pros and cons.

Pros

• Fast funding
• More relaxed eligibility requirements
• Variety of funding options based on needs

Cons

• Short repayment timelines
• Potential for high fees and interest rates
• May encourage a cycle of debt

Where to get short-term business loans

If your company is in the market for a short-term business loan, there are several places to look.

• Banks and credit unions. These are traditional sources of business financing. They typically have physical locations where you can apply or get in-person help. They also tend to offer reasonable rates and fees. But they can take longer to approve loans and tend to prefer lending to established businesses with good or excellent credit, so their eligibility requirements tend to be more strict.
• Online lenders. Online lenders usually focus on quick loan approvals and may have more flexible eligibility requirements. But borrowers with less-than-ideal credit might face very high costs, including high loan fees and interest rates. They may also have lower loan limits compared to banks and credit unions.
• Nonprofits and government organizations. Depending on the size of your business, where you operate, and other factors, local government or nonprofit entities may offer loans. For example, Accion Opportunity Fund offers loans to minority-owned and low-income businesses along with mentoring and educational resources. These sources often have great deals but can involve long lead times, a lot of paperwork and low loan limits.

The bottom line

Short-term business loans are a great way for your company to cover immediate financial needs, such as emergencies or a new business opportunity. They work well if you can repay the funding quickly but don’t qualify for other types of business loans like long-term loans. But you should take care to compare interest rates and fees since these loans can be costly. If you can, take the time to shop around to find the best short-term loan for you.

Frequently asked questions

• Is a short-term loan good for business?

  A short-term loan can be useful if you need financing to help cover costs and keep your business running. But they come at a cost since you’ll have to pay interest and fees. A business credit card is also good for covering short-term  needs. These lines of credit can also help you build credit, and you may even be able to avoid paying interest as long as you pay your balance every month.

• How long is a short-term business loan?

  The repayment period on short-term business loans is generally between 3 and 18 months, though some lenders may go up to 24 months.

• What are the disadvantages of short-term business loans?

  Short-term business loans often have low loan limits and may have high interest rates. You may also pay significant fees, especially if you apply with a lender focusing more on quick approvals or have poor credit.