Picture these scenarios: You run a busy clothing store and your only cash register just broke. Or the holiday season is coming up, and you need to hire extra workers. But you don’t have the cash to fix the register or hire the workers. In both cases, a short-term business loan can help. You get money you need now and, with the profits you make, repay it over a short period of time.
In contrast, long-term business loans are typically larger ($250,000 to $1 million or more) and have a repayment period of five to 15 years or longer, making them better suited to a real estate purchase, a business acquisition or refinancing debt. You may not qualify for these large loans if you have bad personal credit or lack an established operating history, or if you can’t provide collateral to back the loan.
Short-term business loans typically come in smaller amounts ($5,000 to $250,000), carry repayment terms of a few months to a year or two, have looser qualifications and can provide fast cash at a much-needed time. However, short-term business loans generally have high borrowing costs — something to bear in mind when you’re shopping around.
Short-term business loans: Are they right for your business?
There are several situations when a short-term business loan may be appropriate for your small business. Here are a few:
To finance a small expansion: A short-term business loan could make more sense than a long-term loan if you don’t want to carry the debt of a small expansion, such as hiring employees or buying equipment, for years to come. Eliminating the debt earlier reduces financial risk and improves cash flow; it’s one less regular obligation to repay.
To manage cash flow gaps: Uneven cash flow is a common issue for seasonal businesses, such as tax preparers in the tax off-season. Instead of running up expensive credit card debt or taking out a home equity loan to pay the bills, a short-term business loan or line of credit can help manage the slowdown.
For emergencies: What if your clothing store doesn’t have the cash in the bank to fix the broken register? What if you run a pizzeria and your only oven breaks down? Short-term business loans make sense in these types of emergencies. You can get fast cash for repairs, then repay the loan over a short time period — that way, you’re not still paying for a cash register or oven five years from now.
To buy inventory: To keep up with growing customer demand, you may need to buy more inventory. Or perhaps you have the opportunity to buy inventory at a discount from suppliers — but only if you buy it now. A short-term business loan could be your best bet, as long as you’re certain you’ll be able to sell the inventory to cover the costs of the loan.
Where to find short-term business loans
OnDeck: OnDeck provides short-term business loans repaid daily or weekly over three to 36 months and lines of credit that are repaid weekly over six months. Online applications can be completed in as little as 10 minutes, with funding arriving within as little as 24 hours.
You’ll need to meet a range of qualifications. Among them: You must have been in business at least a year, and you cannot have had a bankruptcy in the last two years. To get a term loan, you’ll need a personal credit score of 500 or higher; 600 or higher for a line of credit. And you’ll need to have had $100,000 or more in revenue in the past year to qualify for a term loan; $200,000 or more to qualify for a line of credit.
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Apply on OnDeck’s secure site |
Kabbage: Kabbage provides a short-term line of credit of $2,000 to $100,000, repaid monthly over six months. The application doesn’t require any paperwork, and you can get access to cash once approved, which can take anywhere from a few minutes to several days.
It’s fairly easy to qualify, as Kabbage doesn’t require personal guarantees or a minimum credit score. You’ll just need to have been in business at least one year, have annual revenue of at least $60,000 and have a business checking or PayPal account.
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Apply on Kabbage’s secure site |
Dealstruck: Dealstruck offers three main short-term financing products:
- A term loan starting at $50,000 that ranges from six months to four years, best for one-time large purchases.
- An asset-based line of credit that lets you draw up to 85% of your outstanding invoices (up to $500,000), with draws repaid over a period of six months.
- An inventory line of credit that lets you finance 100% of your inventory purchases up to $500,000, with draws also repaid over six months.
To qualify, you must have been in business at least one year, have a minimum personal credit score of 600, earn at least $12,500 a month in revenue, be profitable, and sign a personal guarantee, with a lien of business assets also required. To find out how to apply for a Dealstruck loan, read our step-by-step guide.
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Apply on Dealstruck’s secure site |
Beware the pitfalls of short-term business loans
Of course, there are a few disadvantages to short-term business loans that small-business owners should keep in mind:
Higher cost: Short-term business loans typically carry a higher annual percentage rate than long-term loans, which refers to the total annual cost of borrowing with all fees and interest included. That’s due to a shorter repayment length, faster speed of funding, looser qualifications than long-term loans (lower credit score and revenue requirements), and the fact that many are unsecured business loans, which don’t require collateral.
More frequent repayments: Lenders may require you to repay the loan daily or weekly as opposed to monthly, which results in smaller, but more frequent repayments. This can be an issue for businesses that have lumpy sales, or those that don’t always hold much cash in a bank account. You’ll have to make sure you have enough money in a bank account to make the payments at all times, or you’ll risk incurring fees or default on the loan.
Risk of debt trap: The speed and ease of short-term business loans can become addictive. Instead of repaying the debt in full, business owners may be enticed to refinance and roll over the debt into a new loan. But this can result in a debt trap: continuous refinancing just to keep up with payments. This is a common issue with merchant cash advances, a costly form of short-term financing that can carry an APR over 300%.
Short-term business loans: The bottom line
Short-term business loans can give you the cash you need to overcome cash flow gaps, handle emergencies and unexpected expenses, or finance a small expansion. But the loans are not all created equal. You should carefully compare the cost of each loan as represented by the APR, taking into account the length of the repayment term and whether you can handle the payments.
Find and compare small-business loans
NerdWallet has created a comparison tool of the best small-business loans to meet your needs and goals. We gauged lender trustworthiness, market scope and user experience, among other factors, and arranged them by categories that include your revenue and how long you’ve been in business.
Steve Nicastro is a staff writer at NerdWallet, a personal finance website. Email: Steven.N@nerdwallet.com. Twitter: @StevenNicastro.
To get more information about funding options and compare them for your small business, visit NerdWallet’s small-business loans tool. For free, personalized answers to questions about financing your business, visit the Small Business section of NerdWallet’s Ask an Advisor page.
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