Short-term business loans are an efficient way to secure funds for your business, typically requiring repayment within three to 18 months. These loans are commonly provided by online lenders, who can handle applications and distribute funds more quickly than traditional banks. Business owners might seek short-term loans for various reasons, such as unexpected expenses, managing seasonal cash flow fluctuations, or capitalizing on business opportunities. Read more about Breathe Pay short term business loans
How Short-Term Business Loans Operate
Short-term small business loans function similarly to other loans. A lender provides you with a lump sum, typically requiring some form of collateral (unless it’s an unsecured loan, which usually comes with a higher interest rate). You repay the borrowed amount according to the loan’s terms, but unlike other loans, the repayment period is shorter—generally 18 months or less. Depending on the loan type and lender, you may need to make daily or weekly repayments to settle the amount in that limited timeframe.
These loans are mainly offered by online lenders, who can often process applications swiftly—sometimes within 24 hours. Once approved, the funds usually appear in your account the same day. However, be aware that the convenience often comes with higher interest rates, as many short-term loans utilize factor rates instead of traditional interest rates.
Comparing Short-Term and Long-Term Business Loans
Long-term business loans come with extended repayment terms, typically ranging from seven to 25 years, and generally feature lower interest rates compared to short-term loans. The longer repayment schedule can facilitate larger loan amounts, result in less frequent payments, and lower monthly costs. In contrast, short-term loans usually require weekly or daily payments, with interest expressed as a factor rate, which can make them more expensive in the long run.
Both loan types offer flexibility for various uses, so it’s crucial to review your loan agreement to understand how you can utilize a short-term loan.
Important Considerations
As with most business loans, short-term small business loans may come with administrative or origination fees, and defaulting can have serious consequences, including significant damage to your credit score.
Reasons for Seeking a Short-Term Business Loan
The motivations for pursuing a short-term business loan can be as diverse as the businesses themselves. Here are some common scenarios where short-term loans may be beneficial:
- Addressing Emergency Expenses: If a critical piece of equipment fails or an unforeseen event disrupts your operations, a quick short-term loan can provide the necessary funds.
- Managing Seasonal Cash Flow Variations: For businesses that experience peaks and valleys in revenue, short-term loans can help navigate periods of reduced income.
- Capitalizing on Business Opportunities: If hiring additional staff could help secure a new client or if making a substantial inventory purchase could yield significant savings, a short-term loan can provide the needed capital.
- Obtaining Financing with Poor Credit: This type of financing often has less stringent eligibility requirements, making it accessible for those with lower credit scores.
