Short-Term Business Loan
Are you running a little short this month, and fear not being able to make payroll? Then a short term business loan or line of credit might just be the answer you are looking for.
Are you a small business owner with steady sales but not very great credit? Are you running a little short this month, and fear not being able to make payroll? Then a short term business loan or line of credit might just be the answer you are looking for.
While the rates might not be so great, if you need a little extra cash flow this month, that might be the price to pay to finance your dream startup. If you do not qualify for a more traditional small business loan from a bank, then a short-term business loan could be your best solution.
In some cases, small businesses take out a short-term loan for their financing needs. These loans are normally required to be paid back in less than 18-24 months. They can help businesses control cash flow, or the money can be used for unexpected expenses that might arise. A short-term loan can help business owners consolidate debt, or it can be used to improve the business.
Who is Eligible for Short-Term Loans?
The qualifying process for a short-term loan is as follows:
One of the main things that lenders look for when offering short-term loans is how much money the business brings in. If the business is doing well financially and is making a lot of money, they have a much better chance of getting the loan.
The lender will examine how much money you make each month. They will look at the history of your business, and they will pull your credit report. The interest rate you will receive for the loan will depend on these factors.
The Application Process for a Short-Term Loan
Lenders require that you apply for a short-term business loan online. Applying online is a quick and simple process. There are certain documents that you need to provide, including bank statements and tax returns. They will run a credit check. In most cases, you can have your money in less than 2 business days.
How do Short-Term Business Loans Work?
There are times in which your business desperately needs a loan. But, is it possible to get money quick? In a short answer, yes it is.
If you need money now, contact Fundera. They can help businesses get the loan they need. They can get the money directly in your bank account quickly, so you can use it for your business needs.
We will examine how these short-term loans can make a huge impact when you require working capital rapidly.
The Basics of Short-Term Loans
Short-term loans function much like traditional loans. However, until you build up your annual revenue, you might not have access to a more traditional business loan from your bank or credit union. This is when a short-term loan can be the best bridge from where you are to where you want to be.
Most of these loans are very predictable. And some are very transparent on their websites what the terms of the loan are. Usually, the loan company will give you the amount of money that was agreed upon. There will be fees to the lender, and there will be interest that you will be required to pay. The lender will tell you how many months the life of the loan is.
Generally, they are an up-front loan service. This means you pay the interest for your funding upfront when you borrow the money. This ensures that the company will get their fees first before your even pay back the capital borrowed. It also means you generally won't benefit from paying back early.
Short-term loans for businesses are not long-term loans; therefore, the amount you will receive will not be as high. You will be paying a higher amount in interest, and the lender may require you to make payments twice a month or even weekly.
On the other hand, short-term loans are simple and quick to apply for. You also will get the funding much faster with short-term loans. However, as mentioned in some cases, you might be required to make payments each week. If you can, try to find a company offering terms that allow for monthly payments to spread out the time needed in between payments.
One thing that business owners need to realize is that these loans are not cheap. In fact, they are much more expensive than long-term loans.
Why are the Interest Rates so High with Short-Term Loans?
Lenders consider these short-term loans risky for them. The application process is quick and easy, and you can receive the funds very fast. Lenders do not invest much time in inspecting your business.
They do not assess the history of your business to see if you will be able to repay the loan when it is due. Therefore, lenders charge more in interest because they are taking a risk by giving you the loan.
Lenders are different on their rates, terms, and conditions. Search around for the best lender for your needs. Ideally, less expensive loans can save you money in the long run. However, if you think a short-term loan will benefit your business, then make sure you proceed with caution and do your research. Make sure your business has created a plan and can repay the loan.
How Business Loans can be Beneficial
All business owners are familiar with the fact that you must have money to make money. It doesn’t matter if you are just beginning your business or if you want to enlarge your business. You need income to be successful.
The truth is, all businesses need some extra money occasionally. When you need extra cash, a short-term loan might be right for you.
You can look at it this way…. If you had the chance to complete a huge order for a customer, they could pay you in two months; however, you need to pay your supplier within the week.
If you do not have the money to pay the supplier, this great opportunity will slip through your fingers.
If you obtained a short-term loan, you will have the income to pay for that order. When you receive the payment from the customer, you can repay the loan.
You could have a small business that makes most of its income during the holiday season, such as Christmas time. With some extra business financing, you will have the money to promote your business before the holidays. You can also purchase all the items you need that will be selling during the season.
In some cases, you might have a desire to expand your business. A short-term loan can help with that. You can also refinance other debts that you might have with better rates and terms. You also might have an opportunity that you cannot pass up. Whatever you need… you can use these loans for anything you wish.
You will have your money quick; therefore, you can be flexible on how you spend the money.
The Cost of a Short-Term Loan
Many businesses who receive a short-term loan pay the loan back very quickly.
You want to get out of debt as fast as possible.
However, if you pay back the loan daily or each week, it could deplete the amount of money you have on hand.
Short-term loans have what they call a factor rate, not an interest rate. You multiply your factor rate by the total amount of your loan. That number will tell you exactly how much you will pay to the lender.
Does that baffle you?
Here is an analogy to explain better.
Short-term business Loans and Factor Rates
Say the lender wants you to pay 1.18 on a factor rate for a $100,000 loan.
The total amount you will pay the lender is 118,000. To get that figure, you will multiply 1.18 by 100,000.
Many short-term loan lenders require you to repay your loan within a year.
How much are you Paying for this short-term loan?
You are making 264 payments if you are making 22 payments in a month. Your annual percentage rate will be 33.54%, which is pretty expensive. Therefore, your payment amounts would be $446.96.
Why are Short-Term Loans more Expensive?
You will be paying much more for short-term loans. The repayment period is often much shorter than other loan options. However, despite this more expensive alternative, if it can help your business grow they might be worth it. You will need to do your research and make the best decision for your situation and business.
What is the reason for that?
Short-term loans are so easy to obtain. These loans are quick and fast to obtain, so they cost more. There is less paperwork, and you will receive the money fast.
However, if you need a short-term loan for a business deal, you might need to take advantage of these short-term loans. At times, they are a good investment for your business.
Loans can be a Good Investment
In conclusion, a short-term loan might be perfect if a business wants to expand. If your personal credit score is less than ideal, and you need working capital quickly then short-term financing can be a good investment in your business.
However, use your best judgment and choose the best loan terms for your business. Keep the loan amount as low as possible to start to avoid getting into too much debt. As you grow your business and start to expand, you can then refinance later on if you need to. Once you can build your business credit, you will have more access to better loans later on down the road.
There are quite a few other options out there when shopping around for financing options. We talk about quite a few of them here on the Chamber of Commerce website. A few other options might be a longer-term loan through your bank or credit union if your credit score is good. You might also qualify for a merchant cash advance if you collect credit card payments regularly.
Growing your startup into a full-scale small business has been a dream of yours for a long time. Don't let a small hiccup or lack of funds get in the way of building your entrepreneurial dreams. A short-term business loan just might be the best choice for you and your business.