Short-Term Business Loans: Everything You Need to Know

In the world before COVID-19, term loans gave business owners the opportunity to secure financing to invest in their business. Term loans fits into cashflow planning by offering a regular payment schedule. But since COVID-19 has created a new normal, you may be wondering what to expect from term loans during and after the pandemic.

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A business term loan is a lump sum of capital (a specified amount) that you pay back with a specified repayment schedule and has a fixed (or adjustable) principal & interest rate or a “factor rate,” which is fixed cost.

Funds from a short-term business loan can be used in lots of business building ways like paying off debts, buying equipment, or purchasing inventory. Short-term business loans are also called quick turnaround loans because they are designed to be paid back quickly. Here’s what you need to know about this solid funding option.

What are short-term loans?

Short-term business loans are a type of term loan. A one-time, sum of proceeds is paid out to the borrower up front. The borrower must repay the full sum plus interest and any fees over the term-typically ranging from a few months to a few years.

Banks in the SmartBiz network offer Bank Term loans with 2–5-year repayment terms. To learn more, visit the SmartBiz website.

On the other hand, long-term loans are a type of term loan that typically have a life of at least 10 years, paid down in monthly installments. When the repayment terms are long, the associated monthly payments are smaller since the total owed is broken down into more segments. These are most useful when you’re planning for steady growth over time, instead of addressing immediate needs.

Requirements to qualify for a short-term business loan

Although less paperwork may be required to apply for a short-term loan, there are still documents you’ll need to produce. Here’s a list of information typically required. Check with your lender before you start the process and enlist the help of a financial professional if you need guidance.

  • Business tax ID number
  • Your personal credit score
  • Your business credit profile
  • Business bank account information
  • 3 months of bank statements
  • Annual revenues
  • Proof of time in business

Is a short-term business loan right for my business?

This type of loan is right for all kinds of small businesses across all industries. If it’s a fit will depend on the reason you’re borrowing. Most of the time short-term loans will have a higher periodic payment than a longer-term loan, but they will likely have less accrued interest—potentially making the total dollar cost of the loan much less.

This is good for businesses because most short-term loans work for a business without assets to put up for collateral and without the need to sign a personal guarantee.

Advantages and disadvantages of short-term loans

Short-term loans can be an excellent source of capital for a business, but they come with drawbacks. Here are the pros and cons.

Short-term loan advantages

  • High credit scores typically not required
  • Limited paperwork required to complete application
  • Process is typically faster than longer term loans
  • Proceeds from a short-term loan can be used in a variety of ways
  • Easier to qualify for
  • Shorter time for incurring interest. As short-term loans need to be paid off within about a year, there are lower total interest payments.

Short-term loan disadvantages

  • The interest rates for short-term loans can be relatively high compared to other loan products
  • Short-term daily payment loans may do more harm than good if revenue fluctuates
  • They typically provide only smaller loan amounts.
  • If you need to continually refinance the loan, you could get stuck in a “debt cycle” accumulating more and more interest and fees.

What are short-term loans best used for

Short-term loans can helpful if you’re able to make the full loan payments on time for the life of the loan. Here are ways you can use funds to support your business.

  • Maintaining cash flow - When you don’t have funding to meet your business obligations, but money is coming in soon, a short-term loan can bridge the gap.
  • Stocking up on inventory - Expecting a seasonal surge in business? Funds from a short-term loan can be used to purchase additional inventory to help you prepare.
  • Short-term hiring - If you need to hire extra help during your busy season, a short-term loan can help cover payroll or training costs.
  • Equipment purchases - Equipment includes machinery, furniture, fixtures, vehicles, computers, electronic devices, and office machines. Short-term funds can help you purchase or replace the equipment necessary to run your business.
  • Emergency repairs - Unfortunately, you can’t always plan for the unexpected. If you need to repair equipment, fast funds from a short-term loan can help

Alternatives to short term loans

Here are other ways business owners can get fast funding.

Business Lines of Credit

A business line of credit allows you to borrow funds up to a limit based on your credit, typically smaller than a term loan. You only pay interest on the amount you use, and you can continue borrowing as necessary until you reach the set maximum. These loans are usually unsecured, meaning that you won’t have to provide collateral to qualify. For in-depth information, read this post from the SmartBiz® Blog: Small Business Lines of Credit Pros and Cons.

Business credit cards are revolving lines of credit. The main distinction is that they don’t terminate once the predetermined limit is reached. They function like personal credit cards, with varying spending rewards and offers depending on the lender. Learn more here: 5 Business Credit Card Myths.

Merchant Cash Advances

A merchant cash advance (MCA) is most often used by small businesses that accept credit and debit card sales. You receive a specific sum in advance that is repaid either by a percent deduction from daily transactions or through daily or weekly payments.

Keep in mind that MCAs often lead to extremely high annual percentage rates. Even the minimum within the range can be several times larger than term loan annual percentage rates. Some APRs can reach up to well over 300%. For more info, read What You Need to Know About an MCA.

SBA Loans

An SBA loan is a government-guaranteed small business loan that has a long term and a low interest rate. The Small Business Administration (SBA) is the government agency that partially guarantees SBA loans, making them more attractive to banks. SBA loans are known as the “gold standard” with 10-year terms resulting in very manageable payments. To learn more about long-term SBA loans, visit the SmartBiz website.

You may have heard that getting an SBA loan is difficult. However, SmartBiz Loans® has streamlined and simplified the process. Our unique technology platform matches small business owners with the trusted lender mostly likely to fund their business. In fact, 90% of the qualified applicants we refer to the banks in our network get funded. Best of all, funds from an SBA loan can be available as soon as 7 days after the application is completed. Discover if you’re prequalified for a low-cost SBA loan in minutes without impacting your credit score here.*

* SmartBiz conducts a soft credit pull that will not affect your credit score. However, in processing your loan application, the lenders with whom we work will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and happens after your application is in the funding process and matched with a lender who is likely to fund your loan.

Where to get short term loans

SmartBiz Loans was founded to help small business owners apply for long-term, low-cost SBA loans. However, not every business owner initially qualifies, and some businesses need funds more quickly than even our streamlined SBA process can provide.

As a result, we worked with banks in the SmartBiz network to offer our clients the next best loan option. A Bank Term loan can be an excellent solution if you aren't quite ready for an SBA loan or need funds more quickly. There’s just one streamlined application to complete and our team of professionals is available to guide you through the process and answer any questions.

The following Bank Term loans are available through SmartBiz marketplace banks for working capital, debt refinance and new equipment purchase:

  • $30,000 to $500,000 loan amounts
  • 2 – 5-year repayment terms
  • Fixed interest rate from 6.99% to 24.99%*
  • Monthly repayments
  • No pre-payment penalties

To qualify for a Bank Term loan from a bank in the SmartBiz network you must be in business 2+ years and have the cash flow to support loan payments. Business owners must be U.S. citizens or legal permanent residents and must have personal credit scores above 640. The owner cannot have outstanding tax liens or any bankruptcies or foreclosures in the last 3 years.