Your business needs money as soon as possible. Like, today. Maybe a big order just came in and you don’t have the necessary supplies to fulfill it. Perhaps a major customer payment hasn’t arrived on time, or a tax deadline is approaching, or an expensive piece of equipment just broke down.
Or maybe there’s an opportunity on the horizon—you’re about to launch a new product, or expand into a new market, or lease a new facility to meet increasing customer demand.
Whatever the case, you’re facing unexpected cash flow issues and need an immediate injection of capital. Could taking out a short-term business loan be the right move? Before you make a decision, here’s what you need to know about short-term financing and the pros and cons of short-term business loans:
What Is a Short-Term Business Loan?
A short-term business loan is capital borrowed for business purposes from a lender, bank, or another external financing source with the expectation that the money will be paid back quickly. Short-term loans are one of the most common ways to fund a business, particularly in the early stages of a company’s growth.
Compared to other kinds of loans, short-term loans are typically smaller and have higher fixed interest rates. They’re also faster and easier to access—many short-term loans are deposited in borrowers’ accounts within one or two business days. And while other loan types may dictate the specific use of funds, short-term loans can be used for almost any business purpose.
The average short-term business loan amount is about $20,000, according to Fundera. That said, amounts can range from a couple thousand dollars to a quarter of a million or more. As you might expect, terms are on the short side, ranging from three months to two years. Expect to pay an interest rate of at least 14% (frequently much higher).
What Are the Pros of a Short-Term Business Loan?
- Stability and predictability: Much like a traditional loan, a short-term loan is a stable, predictable, and straightforward vehicle from which to borrow money. Once you’re approved, you receive a predetermined amount of cash upfront. You agree to pay this cash back, along with the lender’s fees and interest, over a predetermined period of time.
- Ease of access: Short-term loans are faster to apply for, easier to qualify for, and more quickly funded than traditional business loans. This is partially because they require limited paperwork, meaning less hassle for you, and rapid processing and funding time if your application is accepted.
- Flexibility: Short-term loans can be used for virtually any business purpose you can think of. You get to decide when, where, and how you spend the money.
- Speed: Timing is one of the major benefits of a short-term loan. Numerous alternative lenders advertise cash in hand in as little as one or two days.
- No credit, no problem: Bad credit isn’t necessarily an obstacle for getting approved for a short-term loan. For business owners with blips on their credit histories, or limited credit histories, this is a key reason for choosing short-term loans over other forms of financing.
What Are the Cons of a Short-Term Business Loan?
- Limited time to pay back: As their nomenclature implies, short-term loans tend to have brief repayment periods. Don’t take out a short-term loan if you can’t pay it back relatively soon.
- Frequent payments: Short-term borrowers typically pay back lenders on a daily or weekly basis rather than through a monthly schedule. This is a crucial factor to consider if your business has an inconsistent cash flow.
- Serious risks for late payments: The accessibility of short-term loans comes at a price. These are some of the most expensive loans available to businesses. Along with high interest rates, high annual percentage rates (APR) are common, meaning you can expect to pay more in interest on a monthly basis than you would with a traditional loan. Borrowers can risk accruing massive debt—the longer you owe, the more you’ll owe. You may also be putting valuable assets in jeopardy, as short-term loans often require collateral to guarantee the loan.
- Restrictions on credit: If your credit is tied up in a smaller loan, you risk limiting your access to a larger or longer-term loan for another business necessity, such as purchasing property or inventory at a discount.
It’s never a good idea to take out a short-term business loan—or any loan, for that matter—without first consulting a trusted financial advisor. An experienced tax and accounting partner can help you assess your options and determine if a loan is right for your business, or if there’s a better funding option out there. Ask us about growing your business the right way.