Short term commercial loans are becoming more and more popular, especially for startups. These loans provide small businesses with the cash advance they need during times of financial hardship and help keep seasonal companies afloat. Short term loans also help organizations build their credit profiles so that they can grow and expand to meet consumer demand.

Most businesses need to borrow money at some stage, whether to help with cashflow issues, to pay for expansion costs or equipment financing. For those without much capital behind them, short term loans can provide the ideal solution. Thankfully, although recent years have seen a downslide in the number of business loans on offer, there are plenty of short term lending options to explore. Here is everything you need to know about short term business loans.

What counts as a short-term loan?

Most small businesses get their financing from fixed term loans from commercial banks and lenders. Those loans either have short, intermediate or mature term lengths to suit different purposes.

A short term loan is any loan that will be paid back over a short time period – usually one year or less. Many short term loans are repaid much quicker than this, usually between 90-120 days. Just bear in mind that with some lenders, you will be required to pay an early repayment fee if you wish to settle your loan before the full loan term is complete. You will also be charged an administration fee to cover the cost of setting up your loan.

Are short term business loans a good option?

As commercial loans go, short term borrowing is a great option for start-ups and established businesses, as it is relatively low risk. Short term loans can help enterprises to access immediate finance without having to commit to a long-term arrangement.

Short term loans are not recommended for company acquisition, as the amount is unlikely to be paid back within the short time frame. Instead, loans with short terms are ideal for businesses who need to cover necessary expenses immediately.

Why might you need a short-term loan?

“Don’t let money run your life, let money help you run your life better.” – John Rampton, CEO of Due.

All kinds of businesses take out short term loans. Some ventures might need short term loans to purchase inventory or additional equipment for busy periods, such as retail companies during the holidays. Others might use short term commercial loans to raise business capital to meet payroll and other expenses. Short term loans can also be used to cover a dip in funds (say if you’re waiting for a customer to pay their invoice) so you can meet your other expenses or pay your suppliers.

Are you eligible for a short term business loan?

To be eligible for a short term commercial loan, you will need to provide financial documentation to your lender, including a comprehensive business plan. Eligibility requirements vary between lenders, but typically, you will need to deliver the minimum to prove you meet their criteria:

  • A personal credit score of 620-700 or above
  • A record of your payment history for any other loans you’ve taken out
  • Payment history to your suppliers
  • Your business’s cashflow history for the previous 3-5 years
  • Your financial projections for the next 3-5 years
  • A solid business plan
  • Your income statement for the time period specified by the lender

What about startups?

Short term loans can be an excellent choice for startups. However, startups typically have to provide extensive documentation to prove their eligibility for a loan, such as projected cash flow statements for the next 5 years. They will need to provide evidence detailing where their revenue will come from and how it will be paid. Startups may also need to secure their short term loans with a personal guarantee.

What is a personal guarantee?

A personal guarantee is where you have to offer up some kind of collateral to the lender to secure the loan. This might be a personal asset, such as property or your car. It assures the lender that you will cover the repayment amount with personal assets if you default. Although a personal guarantee lowers the risk for lenders and makes you more like to be accepted for a commercial loan, you could end up handing over your personal assets if you don’t meet the specified terms.

Are there any downsides to short term loans?

Although short term loans are a great choice for many small businesses, they do have some downsides. Short term loans tend to have higher interest rates than those with longer terms, for example. They also don’t tend to have APR rates. Instead, the repayments are based on a risk-adjusted flat-rate.

Interest rates for business loans will also vary according to the state of the economy and will be calculated at the discretion of the lender. Lenders will work out your interest rates by assessing the documentation you provide and determining how much you can borrow.

Your interest rates are negotiable, so it helps to be aware of the current prime interest rate for loans in your market. When shopping for a commercial loan, you should always choose the shortest repayment term as possible while still keeping your payments affordable. That way, you will pay less interest over time.

Conclusion: are short term loans the right choice for your business?

Short term loans are essential for the economy. They help many businesses stay afloat when they have cashflow issues and give others the opportunity to grow and thrive. However, taking out a loan for the first time can be daunting, and a short term cash injection isn’t the right solution for every business.

Short term loans are easy to arrange, which is why many businesses go down this route when they need a quick cash advance. You can apply online with minimal paperwork, and you’re more likely to be approved than if you applied for a traditional bank loan. It’s vital that you find the right lender, however, so look for those with flexible repayment terms and low interest rates so you can get the best deal for your business.

Tim Kelly

Mr. Kelly is a 20-year veteran in online business and financing.

He has consulted some of the top brokerages, media companies and financial exchanges in the area of finance, online marketing and content management including: The New York Board of Trade, Chicago Board Options Exchange, International Business Times, Briefing.com, Bloomberg and Bridge Information Systems and 401kTV.

He continues to be a regular market analyst and writer for ForexTV.com. He holds a Series 3 and Series 34 CFTC registration and formerly was a Commodities Trading Advisor (CTA).He was also a licensed Property & Casualty; Life, Accident & Health Insurance Producer in New York State.

In addition to writing about the financial markets, Mr. Kelly writes extensively about small business marketing and finance.

Mr. Kelly attended Boston College where he studied English Literature and Economics, and also attended the University of Siena, Italy where he studied studio art.

Mr. Kelly has been a decades-long community volunteer, he established the community assistance foundation, Kelly's Heroes. He has also been a coach of Youth Lacrosse for over 10 years. Prior to volunteering in youth sports, Mr. Kelly was involved in the Inner City Scholarship program administered by the Archdiocese of New York.

Mr, Kelly was Sr. VP Global Marketing for Bridge Information Systems, the world’s second largest financial market data vendor. Prior to Bridge, Mr. Kelly was a team leader of Media at Bloomberg Financial Markets.
Tim Kelly