Here’s What You Need to Know Before Getting Short-Term Business Loans

Debt can be a tremendous business resource when you use it right. But your situation doesn’t always warrant a loan with a decade-long repayment term.

Here’s What You Need to Know Before Getting Short-Term Business Loans

Debt can be a tremendous business resource when you use it right. But your situation doesn’t always warrant a loan with a decade-long repayment term.

Sometimes, you need cash for the short-term. 

If you need quick financing now but don’t want to lock yourself into a long-term arrangement, you may consider a short-term loan. Here’s what you need to know.

Types of Short-Term Business Loans

Term Loans

Term loans are what you think of when you hear “loan”. They’re loans you get from a bank or similar lender. They tend to (but not always) require collateral. 

Short-term loans have maturities of a year or less, often suiting small businesses’ needs better than long-term loans (maturities longer than a year).

Business Lines of Credit

A business line of credit is a form of revolving credit, meaning you have access to cash on demand (up to a defined limit). You can then pay back the debt at will, making at least the specified minimum payment.

Credit lines are generally unsecured and have good interest rates. 

The catch is that they require excellent credit and solid revenues. Newer businesses may struggle to obtain credit lines through banks and other traditional lenders.

Business Credit Cards

Business credit cards are almost the same as business credit lines. Credit limits tend to be lower, but they’re easier to qualify for.

Plus, business credit cards often come with cashback rewards. You may be able to earn points towards purchases and travel through your spending.

Merchant Cash Advance

A merchant cash advance isn’t exactly a loan — it’s an advance against your future credit sales. The advance provider hands you the money, then takes a portion of your credit sales for a defined period. The provider adds interest in the form of a factor rate. At the end of the payback period, you’ll have paid back the entire advance plus some extra.

Merchant cash advances have quick turnaround times — sometimes as fast as 24 hours. That said, advances require strong credit sales figures.

Invoice Financing

You can turn your uncollected accounts receivables into cash through invoice financing. There are two ways to go about this: asset sales and factoring.

With an asset sale, your lender gives you 75%-90% of the value of your receivables (the extra serves as “interest”), then you sell your receivables to them.

These are great options if you’re struggling to collect on invoices. Losing out on 10%-25% of your accounts receivables for guaranteed quick cash is better than spending excessive time and effort on getting paid.

Some invoice financing lenders structure deals as loans. The lender advances you up to 100% of your receivables’ value and takes those receivables as collateral. You then pay back your loan over time plus fees and interest.

Trade Credit

Trade credit involves setting up a credit arrangement with your vendor or supplier. Instead of paying up front, you may have 30, 45, or even 60 days to make good on your obligation.

Under most trade credit agreements, you owe no interest if you pay by the established deadline. However, paying early (such as within 10 days) may score you a discount.

Pushing your payments down the road with trade credit can lead to better cash flows. You can convert your additional purchasing power into more sales.

Short-Term Financing Interest Rates

Short-term interest rates are generally lower than their long-term counterparts, as a shorter payback period implies a lower risk of you defaulting. This relationship may flip during a recession, though.

As always, improving your financials brings you the best interest rates. Build your credit score, increase your revenues, and improve your cash flows to score lower rates.

For merchant cash advances, there isn’t an interest rate. Providers use the factor rate, a rate between 1 and 2 expressed as a decimal. You multiply this factor rate by the amount advanced to you to find your total cost of funding.

A history of high and stable credit sales will bring you lower factor rates.

Qualifying For Short-Term Financing

Qualifying for short-term financing requires you to present your lender with documentation that proves you a worthy borrower. Most lenders for loans and lines of credit will want to see the following information.

  • Income statement (P&L statement)
  • Cash flow statement
  • Bank statements
  • Business and personal tax returns
  • Records of other loans
  • Collateral documentation

Lenders for these loan types will also check your business credit score, and they may also look at your personal score.

Merchant cash advance providers care mainly about your credit sales history, although they’ll also ask for tax returns and bank statements. Most also check your credit.

Invoice financing lenders focus heavily on your accounts receivables. The most important documents will be accounts payable/receivable aging reports. 

How to Use Short-Term Business Loans to Benefit Your Business

Build Credit

Traditional short-term loans are excellent credit builders. Each timely payment you make increases your credit score bit by bit, opening doors to future types of debt. 

Business credit cards and credit lines are fantastic as well. You can tap these funding sources whenever you need to, allowing for manageable repayment. Strengthening your credit will be easy, as long as you don’t let interest accumulate.

Cover Working Capital Gaps

Short-term working capital solutions are especially useful for seasonal businesses and other cyclical companies. 

For example, a seasonal business can use these short-term debt vehicles to hold themselves over when demand is slow. Then, before demand picks up for their busy season, they can stock up on inventory.

Take Advantage of Opportunities

Whether it’s a new project with high potential returns or a supplier offering a massive inventory discount, your business may want additional capital to maximize opportunities. Short-term loans help you do just that.

Save on Taxes Deductions

In most cases, the interest you pay on your business debt is tax-deductible. If you leverage your debt to invest in new projects (see the above tip), then you’ll effectively have a wider margin between your interest rate and rate of return.

Who Should Use Short-Term Financing?

Overall, short-term loans are terrific for businesses that are seeking to cover working capital needs and seize opportunities. Keep in mind interest rates, and make sure your credit and financials are healthy.

If you’re unsure if short-term loans are for you, or you’re struggling to pick from your many options, Business Capital Consultants can help. We’ll analyze your balance sheet and other financials to determine which method suits your business best, and we’ll help you get great rates through our large lending network. We can handle the process, so that you can get back to business.

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