The Secrets of Short-Term Business Loans That Every Business Owner Needs to Know
3rd April 2018
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The Secrets of Short-Term Business Loans That Every Business Owner Needs to Know

A start-up needs some amount of security and certainty in the early days. While most new companies have the necessary talent and technology, they lack the confidence that comes only after being established for years. Startups have to work hard and innovate to beat the competition, and they may even have to rely on non-traditional resources for things such as funding. Today's entrepreneurs do not solely depend on banks and credit unions for financing. They are more comfortable with short-term loans that come with predictable repayment terms and fixed interest rates. It brings a bit of certainty to the lives of the young entrepreneurs who are otherwise battling with uncertainty to make a dent in the world of business.

Why do start-ups go for short-term business loans?

  • Building business credit score: If your company has no credit score at all, a short-term loan can be a smart way to build it. It paves the way for better loan offers in the future. These loans do not add the monthly stress on business finances as the long-term loans do. Repayment periods can vary between two and six months, and they almost never extend beyond a year as other long-term financing options do.
  • Cheaper than other alternatives: Business credit cards and merchant cash advances are some of the other financing options for people in need of quick cash. However, the short-term business loan is one of the most cost-effective ways to get your hands on business funds. Short-term business loans may not be as flexible as some of these options, but they are surely much cheaper than them. 
  • Source of quick cash: Short-term loans for your business can save you in times of acute emergency cash crunches. Cash flow can never remain even in business. There is always some ebb and flow that come with seasonal marketing and new customer communication campaigns. To keep your company in motion, it becomes necessary to keep the flow of cash steady. This type of a loan with short payment periods can keep your company afloat during the times of drought.

You need to think once before getting your business a short-term loan

Suitable for smaller necessities: The biggest challenge that short-term loans bring is that they are not ideal for every need. They are small amounts that follow short repayment terms. These are not suitable for more significant needs with higher costs. For example, if you need to invest in expensive equipment that your business will use for an extended period, it will be smarter to opt for a long-term loan plan. Since short-term loans are akin to emergency funds, they are easy to access, but at the same time, they come with a higher price tag. The interest rates are often much higher, and it makes no sense to drag the repayment period to a few years. Lengthy repayment terms for short-term loans can lead to APRs that are higher than the principal amount. 

Higher interest rates: The next disadvantage is the interest rates you can expect from the loan companies. Since start-ups often face a lot of financial troubles in the initial days, their credit scores do not remain as healthy as other established businesses. The short-term loan deal and its interest rate will directly depend on your business credit profile. A start-up usually gets short-term loans with much higher interest rates and shorter repayment terms. Therefore, there are higher chances of you finding a secure loan with better interest.

What are the qualifying criteria for the short-term loans?

While looking for a lending party, you will find that different companies have different qualifying criteria for such short-term loans. Most lenders usually expect you to be in business for at least one year. Qualifying applicants need to have a credit score of 550 or more, and they also need to be raking in annual revenue of 50,000. You can expect an average interest rate to start from 10%. With these qualification terms, you can expect a loan amount between 2,500 and 250,000 from any standard short-term business loan company. The terms and the loan amounts will, of course, vary from one provider to another, your business profile, and your specific requirement.

How to secure better lending terms?

If you find yourself in a dire need for cash within a very short span of time, you should check out credit unions first. Since most of these companies and organizations are non-profit, you have a good chance at negotiating the loan amount and interest rate. Private lenders tend to slap higher interest rates on rookie entrepreneurs. Unlike private lenders, the ulterior motive of credit unions is not to make the maximum profit out of an opportunity. However, be sure that when you approach a lending party with more amicable loan terms, you will face a much higher competition or at least stricter qualification criteria for the same loan amounts.


Author: Alexander Fernandise

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