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Are you looking for short term funding for your business? Do you need a cash injection to cover your business’s immediate cash needs? If so then a short term business loan may be suitable for your business. It means you can access immediate cash and won’t be committed to a long repayment period.
In this guide we explain how a short term business loan works and the pros and cons of using one. We also answer common questions like “what are the different types of short term business loan?” and “how do I get a short term business loan?”
Table of Contents
- What is a short term business loan?
- What are the pros & cons of using a short term business loan?
- How do I get a short term business loan?
- Frequently asked questions?
What is a short term business loan?
A short term business loan is any type of loan that you pay back in under 12 to 18 months. It includes several different types of loan like simple business loans, business lines of credit, invoice financing and merchant cash advances.
- Short term loans ranging from 3 months to 18 months.
- May be secured or unsecured, depending on the type of loan.
- Interest rates are generally higher than for longer-term borrowing.
- May not be available for brand new businesses.
How does a short term business loan work?
How a short term business loan works depends on the type of loan agreement. A simple short term business loan works any type of term loan. If you have an interest-only loan, you will pay back interest on a monthly basis and owe the loan balance at the end of the agreement. If you have a repayment loan then capital payments are due alongside interest payments.
Other types of short term business loan include a business line of credit and a bridging loan. A business line of credit works by allowing you to borrow any amount up to an arranged limit. You can also repay amounts during the loan period with no penalties. A bridging loan works by advancing money to cover short-term funding needs like bridging the gap between selling one property and buying another. It is sometimes possible to apply for an extension if the property sale is delayed.
Most short term loans require full repayment at the end of the loan period so you will need to make sure you have a realistic repayment plan in place.
What is a short term business loan for?
Short term business loans can be used for a variety of short term borrowing needs. Some typical uses for short term business loans include:
- Improving cash flow - a short term loan can help new and existing businesses that are struggling with cash flow problems.
- Financing seasonal businesses - your business can pay for stock or other seasonal costs and repay the loan once they receive cash from sales.
- Paying for temporary staff - a loan can help pay for increased staff costs during a busy period.
- Funding business expansion - many expanding businesses use short term loans to finance expansion costs, including buying stock, hiring new staff and funding new premises.
Different types of short term business loan
There are several types of short term business loan, including the following:
- Simple business loan - this works like a personal loan with interest due monthly on the borrowed amount.
- Bank overdraft - like a personal overdraft, you will only owe interest on the amount outstanding at any time. However, this can be a risky way of borrowing as lenders can withdraw an overdraft facility with no notice.
- Bridging loan - many businesses use bridging loans to finance the gap between selling one property and buying another, although they can also be used for other short term borrowing needs.
- Working capital loan - an umbrella term that includes simple short term loans, business lines of credit and merchant cash advances.
- Business line of credit - this is a flexible type of business loan where you can borrow and repay cash up to an agreed limit.
- Merchant cash advance - this may be suitable if you use a cash machine in your business. It works by the lender advancing money in exchange for a percentage of future cash revenue.
- Asset finance - used by many businesses to buy or lease assets. The loan is usually secured on the assets and can be short or longer term.
- Invoice finance - this is where lenders advance cash based on the value of your invoice book. The loan is repaid when cash is received from customers.
What are the pros and cons of a short term business loan?
Here are the main pros and cons of a short term business loan:
- Quick to arrange - some lenders offer quick decisions on short term loans within 24 hours.
- Easier to arrange - Short term loans are a lower risk to lenders because they are repaid quickly. This means they may be prepared to consider lending to businesses with a bad credit rating.
- Flexible - many lenders offer flexible payment options like rolling up interest.
- Cheaper in the long run - you won’t be paying interest for many years so short-term loans are often cheaper in the long run.
- Expensive in the short term - interest rates are often higher than for long term loans and you will also need to repay capital more quickly.
- Mounting costs - interest costs can mount up if you need to raise new finance at the end of the loan period. Some businesses can become trapped in a cycle of borrowing.
- Lower borrowing amount - because lenders assess the affordability of loan repayments, you may be able to borrow a lower amount than with a longer term loan.
- Need repayment plan - new businesses may take a while to become profitable and it is easy to overestimate how much cash you will have available in 12 months. You need to make sure you have a realistic repayment plan.
- May require security - many lenders require security as there’s a risk that you can’t afford to repay the loan balance within a short period.
How do I get a short term business loan?
The application process for a short term business loan varies depending on the lender and the type of loan agreement. Most lenders will run a personal or business credit check ask to see the following information:
- Personal details including photo ID
- Details of your business
- Business account and bank statements
- Details of how much you want to borrow and the loan period
- Information on how you plan to use the loan
Where to get a short term business loan
Here are some providers of short term business loans:
|Lender||Type of loan||Loan period||Loan amount||Typical rates||Other info|
|Bionic||Various||Up to 12 months||Varies||Varies|
|Capalona||Various||Up to 24 months||Up to £500,000||Varies|
|Capify||Various||Up to 12 months||Up to £500,000||20%||Fast application process|
|Cubefunder||Term loan||Up to 12 months||Up to £100,000||Varies||Minimum turnover £50,000 per year|
|Crowd Property||Various||Up to 24 months||Up to £500,000||Varies||Loan decision in 24 hours|
|Fundingxchange||Line of credit||Up to 12 months||Up to £100,000||10-25% APR||Minimum turnover £40,000 per year|
|Iwoca||Line of credit||Up to 12 months||Up to £200,000||Varies||Loan decision within 1 day|
|Mycashline||Various||Up to 18 months||Up to £100,000||Starting at 2.5%||Minimum turnover £60,000|
|Smeloans||Various||Up to 24 months||Up to £500,000||Varies||6 months minimum trading|
Frequently asked questions
Like any loan, a short term business loan will affect your credit score if you don’t keep up repayments. Because short-term loans need to be repaid after 12 to 18 months, it’s important to have a realistic repayment plan in place.
Short term business loans often have higher interest rates than longer-term loans, but rates vary considerably so it’s worth shopping around. Some lenders also charge arrangement fees and monthly fees.
It may be easier to get accepted for a short term business loan than other types of business finance if you have a bad credit rating. This is because short term loans are a lower risk to lenders as they are repaid quickly.
Lenders look at a range of factors including your credit rating, financial records, business plan and any asset you can offer for security when considering your application. If you have a bad credit rating you may be offered a loan with a higher interest rate.
Interest rates for short term loans vary depending on the lender and the type of loan. Most lenders charge higher interest rates on short term than on long term loans. Flexible and unsecured loans tend to have higher interest rates than simple short term loans. You may also have to pay arrangement fees and monthly charges, depending on the terms of your agreement.
Short term business loans can be secured or unsecured, depending on the terms of your agreement.
Some lenders will consider applications without a personal guarantee. This is because the loan is due for quick repayment, so is a lower risk to lenders.
Many lenders will only consider applications from businesses that have been trading for 12 to 18 months. If you own a new business you could consider applying for a start up loan or equity finance.
Unlike a personal loan, most lenders don’t offer payment holidays. It may be possible to extend the loan period to make your repayments more affordable. Speak to your lender in good time if you are struggling to keep up repayments.