Guide to Short-Term Business Loans

Short-term loans are a popular form of business financing. You simply borrow a specific amount of money and then pay it back over a short period of time. The terms vary depending on the lender, but they are usually between 1 and 5 years.

When you need cash for an emergency or an opportunity presents itself for your business, short-term business loans might be the solution you need. They can be used to fund renovations, seasonal preparations, hire staff, manage cash flow, fulfill large purchase orders or support small businesses in maintaining healthy cash flows.

Short-Term Business Loan Benefits

There are many benefits for having a short-term business loan.

  • Pay off the loan quickly: Unlike long term loans, there is no commitment to long-term loan payments. With a short-term business loan you can have the money you need while paying off the loan quickly.
  • Easy to qualify for: the requirements are lower than traditional lenders making them favorable to business owners. An annual revenue of $75,000, a credit score of 540 or higher and one year in business is enough for you to qualify.
  • Fast funding: with a short-term business loan you can approved as little as one day or within hours of applying. Traditional lenders typically take from 6 weeks up to 6 months.
  • Increased approval rates: short-term business loan lenders do not require collateral or lots of paperwork compared to traditional lenders. They also a much higher approval rate.
  • Flexible repayment options: you can set up a loan program that works best for your business and you have a variety of payment options available.
  • Take care of unexpected needs: you can cover costs such as a high utility bill or an unexpected repair for your equipment.

Short-Term Business Loan Disadvantages

Although there are many benefits to short-term business loans, they do come with some disadvantages as well.

  • High cost: short-term business loans carry high APR
  • Frequent repayments: payments are made daily or weekly instead of monthly like other types of loans.
  • Risk of debt: business owners may want to refinance and roll over the debt into a new loan.

How to Apply for a Short-Term Business Loan?

After you have determined that a short-term business loan is best for you, you need to thoroughly review the requirements and do everything right the first time to avoid any delays.

While the requirements vary from lender to lender, there are some basic requirements you should look into when getting started.

  • Personal background information such as education history, previous addresses, names used, etc.
  • Resume
  • Business plan including proof of cash flow, profit and loss, balance sheets
  • Credit reports
  • Personal and business tax returns
  • Financial statements
  • Projected financial statements
  • Personal and business bank statements
  • Collateral that may be required
  • Business licenses and registrations

How a Lender Decides to Approve Your Loan

Below are factors that lenders will analyze before approving your short-term loan.

  • Personal debt ratio: lenders want to see how much of your available credit you are using.
  • Business debt: if your debt is similar to other businesses in your industry, you are in good shape but if it is too high, they will reconsider your application.
  • Business revenue trends: lenders will be more willing to approve you if they evaluate your revenue growth and see how it compares to the industry standard.
  • Personal debt coverage: lenders look at this to see if you will be able to make the payments.
  • Business debt coverage: lenders want to know how you handle any debt you have so they will look at your cash flow and debt payments to see if you will be able to make your payments on time or not.

How to Improve Your Chances of Getting a Short-Term Loan

To improve your chances of getting approved, make sure you have a healthy credit score so the lender can feel comfortable letting you borrow their money. You will also qualify for favorable terms and interest rates which will save you a lot of money over the life of your loan.

If you have a poor credit score, you can look for ways to improve it such as making timely payments and correcting any errors that show up on your credit report.

The Bottom Line

Before applying for a short-term business loan, make sure you have all the knowledge possible and determine if this is right for your business. Make sure you submit all the requested documents in a timely manner in order to avoid any delays in receiving your funds. If you have a poor credit score, begin by making the steps to improve it so you have the best terms possible.