Short-Term Business Loans: What They Are & Does Your Business Need One?
Table of Contents
What Is a Short-Term Business Loan?
Key Features of Short-Term Business Loans
When Is a Short-Term Business Loan Right for Your Business?
Potential Risks of Short-Term Business Loans
How to Qualify for a Short-Term Business Loan
Where to Get Short-Term Business Loans
Alternatives to Short-Term Business Loans
How Prestige Commercial Capital Can Help
About the Author
What Is a Short-Term Business Loan?
A short-term business loan provides a lump sum of capital that you repay over a brief period, typically within one to two years. Unlike traditional long-term loans, these are designed for quick access to funds, making them ideal for urgent needs like covering payroll, purchasing inventory, or seizing time-sensitive opportunities. However, their higher costs and frequent repayment schedules require careful planning.
At Prestige Commercial Capital, our same-day Microfunding ($5,000-$20,000) and business funding options up to $2M can provide the fast capital you need with terms tailored to your business.
Key Features of Short-Term Business Loans
Short-term loans differ from traditional loans in several ways:
Term Lengths: Repayment periods typically range from 3 months to 2 years, much shorter than long-term loans that may extend beyond five years.
Interest Rates (Factor Rates): Instead of traditional interest rates, short-term loans often use factor rates (e.g., 1.09 to 1.6, or 9%-60% of the loan amount). For example, a $10,000 loan with a 1.35 factor rate means a $3,500 fee, totaling $13,500 to repay. These fees are fixed and calculated upfront, so you know the full cost from the start.
Additional Fees: Some lenders charge origination or closing fees, increasing the overall cost.
Repayment Terms: Payments are often daily or weekly, automatically deducted via ACH from your business account, unlike monthly payments for traditional loans. Some lenders, like Square Capital, offer flexible payments tied to sales.
When Is a Short-Term Business Loan Right for Your Business?
Short-term loans are a powerful tool in specific scenarios but aren’t suitable for every business. Here’s when they make sense and when they don’t:
When It’s the Right Choice
You Need Money Fast: Funding can be available in as little as 24 hours, perfect for emergencies or opportunities like restocking inventory for a busy season.
You Have Poor Credit: Consistent cash flow often matters more than credit scores, making these loans accessible for businesses with subpar credit.
You Prefer Flexible Use: Most lenders don’t impose strict usage requirements, allowing you to allocate funds for any business purpose.
No Specific Collateral Required: Lenders typically require a personal guarantee or blanket lien, not specific assets like equipment or property.
When It’s the Wrong Choice
High Costs Are Unmanageable: Factor rates are often higher than traditional loan interest rates, increasing the total repayment amount.
Inconsistent Cash Flow: Daily or weekly payments can strain businesses with fluctuating revenue.
Prepayment Penalties: Some lenders don’t offer savings for early repayment, as the fixed fee is set upfront.
Potential Risks of Short-Term Business Loans
While short-term loans offer speed and flexibility, they come with risks to consider:
Expensive Rates: Factor rates above 1.20 (20%) can be costly. Rates at 1.40 (40%) or higher should be avoided unless absolutely necessary.
Prepayment Penalties: Since fees are fixed, paying off early doesn’t always reduce costs. Look for lenders offering early repayment discounts.
Fixed Payments: Daily or weekly deductions don’t adjust with revenue drops, which can strain cash flow during slow periods.
Double Dipping: Some lenders charge fees on renewed or refinanced loans, effectively making you pay interest on interest. Choose lenders who avoid this practice.
At Prestige Commercial Capital, we prioritize transparent terms and work with you to find solutions that align with your cash flow needs.
How to Qualify for a Short-Term Business Loan
Qualification requirements vary by lender, but here are general steps to improve your chances:
Ensure Consistent Cash Flow: Lenders prioritize your ability to make frequent payments, so demonstrate steady revenue.
Prepare Documentation: Provide bank statements, tax returns, and business financials to streamline the application process.
Check Your Credit: While poor credit may not disqualify you, a better score can secure lower rates.
Have at Least 3 Months in Business: Most lenders require a minimum operational history.
Clear Outstanding Debts: Settle any existing liens or loans to strengthen your application.
Where to Get Short-Term Business Loans
Short-term loans are widely available from various sources:
Online Lenders: Platforms like Lendio or Fundbox specialize in fast funding for businesses with sub-optimal credit. Always research to avoid predatory lenders.
Traditional Banks: Some banks offer short-term loans with better rates but stricter requirements and longer approval times.
Merchant Services/Payment Platforms: PayPal, Square, and Stripe provide loans with repayments tied to a percentage of daily sales, offering flexibility but potentially higher costs.
Alternatives to Short-Term Business Loans
If a short-term loan’s risks outweigh its benefits, consider these options:
Microloans: Smaller loans (often under $50,000) with more flexible terms, ideal for startups or businesses with limited credit.
Merchant Cash Advances: Repayments based on future sales, suitable for businesses with strong credit card revenue.
Crowdfunding: Platforms like Kickstarter can fund specific projects without debt.
Business Lines of Credit: Our lines of credit up to $150,000 at Prestige Commercial Capital offer flexible access to funds with potentially lower costs.
Explore our guide to small business loan types for a deeper dive into your options.
How Prestige Commercial Capital Can Help
Short-term loans can be a lifeline, but they’re not one-size-fits-all. At Prestige Commercial Capital, we offer a range of financing solutions to match your needs, including same-day Microfunding, business lines of credit, and funding up to $2M. Our team works with you to avoid pitfalls like high fees or inflexible repayments, ensuring your business stays on track.
Ready to explore your options? Contact us for a free consultation and find the right funding to fuel your growth.
About the Author
This guide is by Prestige Commercial Capital, an Orange, CA-based lender empowering small businesses. We offer business lines of credit up to $150,000, same-day Microfunding ($5,000-$20,000), CoreRate Preferred Funding, business funding up to $2M, and SBA loans.
Contact us at https://prestigecommercialcapital.com or (888) 913-2240 for assistance.
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