Time to Funds
In the world of finance, the “term” of a loan is simply the duration you’ll be repaying it. If you have a 30-year mortgage on your house, for example, the term is 30 years—one of the longest-term loans generally available.
A short-term loan, then, is at the other end of the spectrum. These small business loans will have a term ranging from one to three years, making them a good option for relatively small expenses or ones that you plan to pay off quickly.
Is a short-term loan a good way to meet the needs of your small business? Read on to help you decide.
When you take out a short-term loan, you’re borrowing anywhere from $2,500 to $500,000. That’s a big range, and it means short-term loans can meet a wide array of needs. Because these loans will need to be paid off in one to three years, however, borrowing the maximum amount will require significantly higher monthly payments than you would find with a more drawn-out loan term of 5, 10, or even 25 years.
With the limitations of a short-term loan in mind, most small business owners will opt to use them for smaller expenses or more immediate needs. Because short-term loans can be funded as soon as 24 hours after approval, they’re a great way to finance a rapid expansion or an investment opportunity that won’t last long. Interest rates will vary based on a borrower’s credit history, but well-qualified applicants can borrow at rates as low as 8%.
Short-term loans are extremely versatile, but it’s best to think of them as a source of fast cash to get you through pressing financial needs. Once the need is met, you’ll want to pay off the loan as soon as possible.
Is a short-term loan a viable option for your small business? It could be if any of these scenarios sound familiar:
Maybe your last-mile delivery business is booming, and you’d like to add three more delivery vans to your fleet. Even if you could afford to pay for the vehicles out of pocket, a short-term loan might be a good way to help you preserve working capital so that other aspects of your business aren’t hampered by the purchase. Provided your investment is producing a healthy return (and you can pay off the loan in a reasonable amount of time) the 8% interest rate could be well worth it.
Versatility is one of the main advantages of short-term loans because they can be used for so many different kinds of expenses. Whether you need to restock inventory that’s flying off the shelves, upgrade your office furnishings, or hire a marketing superstar who can help take your business to the next level, short-term loans are a great choice for quick cash.
Are there situations where another financing option could be a better choice than a short-term loan? Yes, if:
If you’re looking to buy a fancy new office space to serve as your business headquarters, a $500,000 loan might not be enough—and even if it was sufficient, a three-year term would make your monthly payments astronomical. In this kind of situation, a financing option such as a Commercial Mortgage could offer a lower interest rate, and the longer-term would produce much more palatable monthly expenses.
Over 2 Years
Qualifying for a short-term loan is largely dependent on two factors: your credit score and business history. With a higher score, your odds of approval obviously increase, and you’re likely to secure a better interest rate. The same is true the longer you’ve been in business, although some startups can qualify with the appropriate collateral to secure the loan.
If you have a low credit score or a new business, don’t despair. We still encourage you to fill out our loan application to see if you qualify for a short-term loan or any other small business financing options.
A short-term loan is a jack of all trades for small business financing, but it’s not going to be the perfect fit for every occasion. Before you take out a short-term loan, weigh the following pros and cons:
The short-term loan is a common financing tool for a reason, but is a short-term loan the right choice for your small business? In our opinion, you should use short-term loans to meet smaller needs that you’ll be able to pay off quickly. Borrowing too much can quickly land you in financial trouble when you’re expected to pay a loan back in just one to three years, so it’s best to approach the short-term loan with firm financial footing and a clear repayment plan. In these instances, even when you can afford an expense without borrowing, a short-term loan can allow you to preserve your own capital and put it to work elsewhere in your business.
In the hands of a savvy borrower, short-term loans are a valuable addition to the small business financing toolkit. For a quick rundown of all Lendesca’s loan products, visit our Loan Types page. When you’re ready, fill out an application and you’ll see all the different ways we can help you fund the next chapter of your small business.