How to get the best short-term business loans
Speaking of small business loans, you may be tempted to think that traditional bank loans of more than 5 years repayment term are the only option available. But as much as long-term loans can come in handy when you want to grow your business, purchase expensive equipment or venture into new markets, some instances like when you are short of working capital will require a short-term loan. But even applying for short-term business loans in traditional lending institutions has its own drawbacks. The lengthy application process is inconvenient, and it can take up to weeks for the funds to be approved. Luckily, your local bank is not the only place where you can access short-term business funding. There are many lending options available for different loan purposes, and you can easily access a short-term loan to cater for both immediate and future business needs.
When should you consider a short-term business loan?
This is the first question that you need to ask before taking out a short-term loan;
Why do you want to borrow?
Asking this question will help you know the amount of capital you need, the most convenient loan term (either short-term or long-term option) and the best place to get funding. Depending on how you want to use the loan, you may consider short-term business loans to minimize the cost of the loan. Short-term loans come with minimal fee charges and other expenses. Among the reasons why you should consider short-term business loans include:
- For project start-ups
At times, you may have business projects with high upfront costs that cannot be covered by the business cash flow but will be recouped when customers’ invoices are paid. In this case, getting immediate business financing at an affordable cost can be a good solution than going for long-term loans with a longer repayment period.
- Bridging cash flow gaps
Most small business owners borrow funds to meet their short-term financial needs. For instance, a customer may take goods worth a certain amount and promises to pay in 60 days. If you do not have enough cash to pay employees at the end of the month or purchase inventory, you can consider taking out a short-term loan to cover for such expenses before the customer pays. This will ensure that the business has sufficient cash flow.
- Purchase of inventory at a discount
Business owners also use short-term loans to purchase inventory at a discount price for the business to make extra profits.
- Cover emergency repair costs
If important equipment fails to operate, a short-term loan can help fix the situation rather than committing yourself to long-term financial obligations. Besides, short-term loans have a faster approval rate, which will also help save on time.
How a short-term loan works
While loan repayment is a much straightforward process, there are a number of differences between short business loans terms and traditional long-term loans. As the name suggests, short-term business loans have to be paid within a short period of time when compared to long-term financing. Most lenders provide short-term loans for a few months up to one year. Since the loans are mostly provided to cater for immediate business needs, the principal amount is also less compared to long-term loans. Even so, you can still qualify for a higher loan amount of up to $500,000.
Best short-term business loans 2018
If you decide that a short-term loan is the best solution for your situation, you should consider working with alternative or online lenders. Most online lenders provide short-term loans with repayment terms of less than 18 months. But with SBA and traditional bank loans, the repayment term can be as long as 20 years depending on the loan amount.
- Short-term loans best for: credit score of less than 600 OnDeck, QuarterSpot, Credibly, SnapCap, PayPalWith the above loan options, you don’t need to have a high credit score for you to qualify for working capital business loans. With PayPal working capital, credit score is not a requirement for businesses to access funding. However, you should be a PayPal Business or Premier Merchant to access the loan. The remaining four lenders have restrictions in years of business and annual revenue. This means that you should aim for minimum revenue of $100,000 to qualify for the loan.
- Short-term loans best for: businesses under one year oldCredibly, SnapCap, PayPalWith the three borrowing options, your business should be between 3-9 months to qualify for funding. As mentioned before, PayPal working capital loan will require you to be a PayPal merchant to access funding. Credibly and SnapCap provide working capital for every type of business that has been in operation for less than one year.
- Short-term loans best for: businesses with annual revenue of less than $100KLendingClub, StreetShares, PayPal working capitalThe three lenders have flexible revenue requirements for business credit. You can qualify for a loan if your business generates annual revenue of between $15,000 and $75,000. With StreetShares, you only require annual revenue of $25,000 to apply for a short-term loan. PayPal working capital has a $15,000 annual revenue requirement. Lastly, LendingClub has a minimum revenue requirement of $75,000 but you should be in business for at least 2 years to qualify for the loan.
- Unsecured short-term business loansQuarterSpot, Credibly, LendingClubQuarterSpot and Credibly do not have collateral requirements when applying for a short-term loan. LendingClub does not require collateral for loans of less than $100,000. They can be a great option if you only want to borrow a little amount with quick turnaround.
- Best options for larger loan amountsFunding Circle, OnDeck, SnapCap, Fundation, Bond StreetIf you need fast business loans of more than $300,000, all the above lenders provide loans for up to $500,000. Bond Street provides loan amounts of up to $1M with affordable rates. With SnapCap, you can borrow a short-term loan of up to $600,000. The remaining lenders have $500,000 as the highest loan amount. Fundation and Funding Circle provide loans at affordable cost, but they also have strict eligibility criteria. If you cannot meet the requirements, SnapCap and OnDeck can be a good alternative.
How to qualify for a short-term business loan
When applying for short-term financing, it is also important that you first understand the process. As much as some lenders have tight restrictions, you can still increase your chances if you follow the guidelines and provide all the required documents. Besides the business financial history, some lenders may also consider your personal credit score, which is important that you also improve your credit before requesting for a short-term business loan.
- Ensure your documents are ready.Start out by providing all the documents required by the lender to process the loan. Lenders have different requirements, but some of the documents that most lenders consider include;
- Your personal identification card
- Personal tax returns
- A voided business check
- Bank statements
- Proof of ownership
- Demonstrate your ability to payYour annual revenue is also among the considerations by many online lenders. You should also have a positive account balance to increase your chances of having the loan approved.
- Have a good credit scoreThere are lenders who do not consider credit scores when approving your loan, but maintaining an attractive credit will qualify you for higher loan amounts at affordable interest rates.
- Be preparedBesides providing all the required documents, lenders will also want to get more information about your business, including the business’ overall health. When applying for a short-term loan, be prepared to answer some questions concerning your business. For instance, you may be asked whether you will be able to pay back the debt in case your business fails. The lender may also want to know your thoughts about the future of your industry. Earlier preparations will make the process much easier and convenient.
Ultimately, the funding option you require depends on your business needs. Short-term loans are however more suitable for businesses that want to meet their immediate financial needs without committing to long-term loan payments. Short-term loans are available for both start-up and established businesses. They are an easy way to obtain fast business funding with less hassle. It is also important that you work with a lender who understands your business needs and tailor your loan to achieve success.