How We Choose the Best Short-Term Business Loan
- Loan features: Each lender has a cap on how much it will lend, with some offering significantly higher loan amounts than others.
- Application process: Some lenders do a hard pull on your credit when you apply, while others do a soft pull. Some applications are lengthy, while others short.
- Interest rates and fees: Every lender has different formulas for determining your interest rate, and many charge additional fees. The cost of borrowing can be expensive, so we took the time to look for lenders with the best rates.
- Qualification process: Before applying, see what criteria you need to qualify for a short-term loan. Credit scores, time in business, and annual revenues may factor in.
- Customer support: You want a lender who is easy to reach on a variety of platforms, including phone, email, and chat.
- Online user reviews: It’s smart to read reviews on independent review sites like Trustpilot to see what people say about a lender.
- Perks and bonuses: Lenders should work to get your business. Many offer additional features such as payment flexibility, advertising transparency, and advanced technology.
What Is a Short-term Business Loan?
A short-term business loan offers borrowers a lump sum of cash that’s paid off in monthly installments, usually at a fixed rate of interest. Repayment terms can be anywhere from a few months all the way up to five years.
Short-term loans can be secured or unsecured, with secured loans requiring collateral. The main pro in backing your loan with collateral is you’ll typically receive a much lower interest rate.There are many different types of collateral, including cash, property, vehicles, inventory, stocks, bonds, and more.
Generally, these loans are used to pay for one-off investments or expenses, but can also be handy in emergency situations when you need funding quickly. Given their versatility, short-term loans are one of the most common types of lending you’ll find.
How Do Short-term Business Loans Work?
In general, short-term loans have similar characteristics to long-term ones. You borrow a set amount of money from a lender and have to repay it over an agreed period.
However, one of the main differences between the two is that payments usually have to be made on a more frequent basis. In most scenarios, lenders will ask for weekly payments. Moreover, this means the interest rate is usually based on a “factor” rather than an APR.
For example, some short-term business loans may use business days in a year to determine the repayment plan. So, for a 12-month loan, you’d have to make repayments based on 264 business days. Understanding these subtle differences is crucial when you’re searching for short-term loans online.
When to Consider Short-Term Business Loans
There are a few situations in which a short term business loan may be ideal:
- You need access to capital quickly. Many short-term loan lenders give same-day decisions on applications and can fund your loan within 24 hours. This may be a great way to get access to cash fast
- You don’t qualify for other types of financing. Short-term loans often have less strict requirements to qualify. As a result, you may be able to get financing with poor credit or minimal time in business.
- You can pay back the loan quickly. Given the short nature of the repayment period, you’ll be limited in how much you pay in interest. Just be sure to calculate your monthly loan payment before signing the loan agreement to ensure you can afford it.
When to Avoid Short-Term Business Loans
Although short term loans can fill a need or two, there are certain situations when you might want to look for an alternative.
- You can’t afford to pay a large amount over a short period. It may be tempting to take out as large a loan as possible. But with a short term loan, this means you'll have a hefty loan bill due each month. If you can’t afford to pay it with what you’re bringing in now, a short-term loan may not be ideal
- The money won’t help you make more. Taking out a business loan can help you move your business forward. You can hire more staff members to increase productivity and serve more customers. If the short-term loan won’t do that, consider other types of financing.
- The interest rate is astronomical. Interest rates on short-term loans can get crazy, especially if you have bad credit. Calculate the total you’ll pay in interest, including origination fees, and decide whether the cost of financing is worth it.
Business Short-term Business Loan Rates
There are a number of factors that will determine the rates you’ll get on a business term loan. While rates will vary by lender and by your specific qualifications, you can expect a range from 4.00% - 30.00%, on average. Determining factors are outlined below.
- Credit score - The higher your credit score, the lower your rates tend to be. This won’t always be the case, but it’s the factor that is most commonly used by both traditional and alternative lenders.
- Length of time in business - The longer you’ve been operating, the lower your rates will be.
- Financial performance - From a lender’s perspective, the more money you’re earning, the lower the credit risk you present. If you can demonstrate a consistent level of profitability, then there’s an excellent chance you’ll be offered competitive rates.
Average small business loan interest rates for 2023 >>
How to Qualify for a Short-term Business Loan
Specific qualification criteria, such as monthly income and credit score, will vary between each lender. It’s worth checking your credit score and getting your documents together well in advance of any application.
Lenders will commonly ask for:
- Valid ID, such as a passport or driver’s license
- Two years personal and business tax returns
- Three months of business bank statements
- Proof of ownership of your company
- Evidence of asset ownership if you’re opting for a secured loan
- Business lease, if applicable
How to Apply for a Short-term Business Loan
The process will depend on each lender, but you can follow these general business loan application guidelines below to get an idea of what to expect
- Shop around – These days, most lenders will let you submit an application without facing a hard pull to your credit rating. We recommend submitting applications to a few different platforms. Assess each of them carefully before you accept a final offer.
- Prepare your documentation - You should have all of your financial records ready before you officially submit your application. This will speed up the process and make things much easier for you.
- Wait for approval - Most lenders will be able to either instantly reject your application or pre-approve you for a number of different offers. If you accept an offer at this stage, you’ll receive a hard pull against your credit rating. Full approval can happen in just a few hours, with funding taking place as soon as 24 hours from approval.
If you’re short on cash or want to take advantage of an opportunity and can’t wait for a bank loan application to process and fund, a short-term loan can provide the capital you need, fast.
Additionally, if you don’t have the credit scores required to qualify for traditional loans, short-term loans may open the door to the financing you seek.
Just keep in mind that with this convenience comes expense. Short-term loans often come with higher interest rates, so factor that cost into your decision to take on financing.
*The required FICO score may be higher based on your relationship with American Express, credit history, and other factors.