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Last updated: 15 November 2022

Short-Term Business Loans: An Easy Guide to Getting Funded

What Is a Short-Term Business Loan?

A short-term business loan is a type of business loan with fixed and regular interest payments that is granted to meet certain obligations or fix any urgent need for business funding. It is usually given for periods of 3 to 6 months or 1 to 2 years depending on purpose of loan. At the end of given period, the loan amount must be paid back in full.

It differs from long-term business loan in that the repayment schedule is relatively short and the amount of money being borrowed is typically smaller in short-term commercial loans.

Many businesses have the need to seek additional funding due to unforeseen circumstances taking a hit on their working capital, or some cyclical businesses having the need to buy their inventory in advance. In such scenarios, swift and easy funding in the form of a short-term business loan can be the perfect way to boost your business.

5 Things to Know Before Applying

Before venturing out in the loan market, it is critically important to have a good idea about the lenders you will be dealing with, their terms and conditions and minimum requirements that should be satisfied among other things. Below is a list of 5 most important aspects that you must take note of before applying for a short-term business loan.

1) Types of Loan Providers

Some of the major sources of short-term business loans in the UK are banks, credit unions & online lenders. The process of obtaining a loan through banks & credit unions takes relatively longer due to credit checks and amount of paperwork involved. Also, they mostly provide the type of short-term business loans that are secured loans, which are secured  through some sort of collateral, making them less risky for lenders.

On other hand, the market has recently witnessed a surge in online lenders who are using the accessible technology to reach a wider group of people. These lenders have cut their costs by operating online and they provide the type of short-term business loans that are unsecured with limited credit checks.

Online Lenders

2) Annual Percentage Rate (APR)

APR is annualised cost of borrowing plus any additional costs associated with the loans, such as processing and broker fees. It tends to be higher for short-term business loans compared to long-term business loans.

This is mainly due to some of features of short-term business loans, such as shorter repayment period that increases frequency of payments to the lender. Repayments can be made daily, weekly, or monthly, depending on the type of loan.

As the APR tells you the total cost of your loan over a year, it is important to keep an eye on this figure when choosing a loan provider. If it is not provided, you must ask for this number as it tells you the true price of your loan.

3) Default Penalties

Sometimes it can get difficult to keep up with regular interest payments if you are a small business that is slow in generating revenue. If your short-term business loan is secured and you fail to make regular payments, you could risk losing your collateral.

And if your loan is unsecured, most online lenders also have late payment fees and other default penalties listed in their terms. Thus, it is strongly advised to be well aware of the terms and conditions related to default penalties before signing up for a short-term business loan, which can be either secured or unsecured depending on type of loan provider. Each loan agreement may have different terms, so it is crucial that you read the fine print to be aware of the conditions for your specific loan .

4) Authenticity of Lender

When choosing a lesser-known lender, it is important to be sure about their authenticity. This is particularly a problem for online lenders, which are relatively new in the market. It may be difficult to tell if the lender is verified, so always check whether you are on a secure website and if lender is well reputed to avoid being a victim of online scams .

5) Minimum Requirements for Approval

The minimum requirements set by banks for being granted short-term business loan are quite stringent and includes your company’s financial history and credit rating. On the other hand, the requirements set by online lenders vary from lender to lender. A general rule of thumb is to have at least six months of business history and a regular stream of revenue.

Short-Term Business Loan - Pros and Cons

It is important to look at pros and cons of a short-term business loan to critically analyse its features. One of major benefits of a short-term business loan is that it is easy to obtain if you meet all the basic conditions . In the case of online lenders, the entire process takes place online and approvals can be granted within a few days without any need for credit checks or collateral.

Secondly, a shorter repayment period can help you pay off the loan before maturity and save on interest charges if there is no early repayment charge. And lastly, you can also improve your credit score if you make all loan payments on time.

There are drawbacks to short-term business loans and if it is not well planned out, the higher interest rate can tie up working capital and company’s finances in the short-term. Secondly, if payments are irregular, interest will accumulate and you will be forced to refinance the loan with additional charges.

Lastly, any short-term debt has an impact on your balance sheet by increasing current liabilities. If you end up in a circle of debt, it threatens to make your business insolvent in the long run.

Short-Term Business Loans
Easy Approval ProcessHigher APR
Shorter Repayment PeriodPenalties for Irregular Payments
Improves Credit RatingHigher Financial Risk

Getting a Short-Term Business Loan for a Startup or Small Business

As startups have unpredictable cash flows, lenders will sometimes doubt their ability to repay. Although many lenders will still provide short-term business loans for startups if they are less risk-averse than most banks in order to stay competitive.

The requirements to qualify for short-term business loans are slightly trickier for startups than other businesses . For instance, it will be expected that startups provide a detailed business plan with a comprehensive revenue model and realistic growth targets .

Although some lenders can also be risk averse and will only choose to provide a short-term business loan that is secured with a collateral. A collateral can take many forms, such as personal guarantee, equipment and machinery, or even a share in future revenue.

Similarly, business funding for small businesses is also key to a growing economy. These small businesses will often find the need to manage their own cash flows with a short-term business loan. A major advantage for both startups and small businesses is to use short-term business loans as a tool to improve their own credit rating .

Find Short Term Business Loan

Can You Get a Short-Term Business Loan with Bad Credit?

This question often arises when applying for short-term business loans as many traditional banks in the UK do not reveal credit requirement before processing your loan request.

This problem is mitigated by the presence of many alternate sources of business funding such as peer-to-peer lending, crowdfunding and online lending marketplace including likes of Funding Circle, Fleximize, Wonga etc .

These sources make it possible for businesses with bad credit history but strong revenue to obtain short-term business loans with no credit checks. The downside is that you will be charged a relatively higher APR as compensation for risk faced by lender.

Find the Best Short-Term Business Loan

When you decide to apply for a short-term business loan, you should look at following points in succession:

    • Define purpose of your short-term business loan.
    • Choose your loan provider (bank or online lender) and type of short-term loan that is suitable for your business need.
    • Thoroughly analyse their terms and conditions including APR, default penalties, minimum requirements and other hidden costs.
    • Determine the amount you need to borrow and the term period in which you will be able to repay loan amount.
    • Make a detailed plan on how the loan will be used by your business.

You must be fully aware of risks associated with short-term business loan such has higher APR, penalties for default and its overall financial risk .

If you are confident that a short-term business loan will help you manage your cash flow and that you will be able to pay it off in time, then it can be a very efficient choice.

All content in this website is for informational purposes only and it does not constitute financial advice and/or recommendations and it should not be relied upon as such. 

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