In the wake of the coronavirus, many small businesses may be struggling to pay vendors, bills, or employees. While the federal government is offering some relief through Small Business Administration (SBA) loans—like the Paycheck Protection Program—not all small businesses will qualify. Meanwhile, some major cities and states are offering relief funds to small businesses. However, these options may not be available to all small business owners.
Luckily, financial relief may be available through other avenues. Short-term business loans may be the solution your business needs for quick financial aid. In times like these, a short-term business loan can help your business
- Pay expenses when sales decline due to unforeseen circumstances.
- Pay expenses while you’re waiting for clients to pay invoices.
- Pay expenses while you’re waiting for funds to come through another lending source.
- Gain capital to start a new revenue stream like online sales or delivery services.
Other situations may also apply. No matter what your situation, research your options fully, including other business financing options. If a short-term loan is right for you, compare lenders and their terms.
What are short-term business loans?
Short-term business loans are loans with rapid repayment terms ranging from a few weeks to 18 months. Typically, business owners with an immediate financial need, like hiring seasonal workers or stocking inventory, can benefit from short-term loans. The size of your loan will depend on the lender’s terms and your financial needs.
The difference between short-term and long-term loans
The biggest differences between short- and long-term loans are the repayment terms, qualifications, and loan sizes. Long-term loans may offer repayment terms ranging from 12 months to 30 years. Long-term loans also come with larger loan limits. In 2017, the average SBA loan size was $107,000. In 2020, the average short-term loan size is $20,000, according to Fundera.
Long-term loans will often have lower interest rates, little to no fees, lower monthly payments, and longer repayment periods. Short-term loans may have higher interest rates, potential fees, and daily or weekly payments. Credit scores can also influence a business’ eligibility for a long-term loan. Typically, a business must have a higher credit score to borrow a long-term loan. Short-term loans, however, may be more accommodating to businesses with no credit history or a bad credit score. However, both have their place in providing much-needed financial assistance to small businesses.
Pros and cons of short-term business loans
They offer fast financial relief
Short-term loans can provide fast financial relief to businesses. The application process may only require a credit check, proof of ownership, and business financial documentation. Depending on your lender, processing the application and funding the loan may take hours to days.
They come with short-term repayment plans
Short-term loans also have shorter repayment schedules. Some loans are designed to be paid back within weeks or months. As a result, some borrowers may spend less time in debt.
Lenders can be flexible with borrowers with bad credit scores
Short-term loans generally offer more flexibility to lenders. Some businesses with poor credit and younger businesses may be able to secure a short-term loan. In exchange, lenders may require borrowers to secure the loan with collateral or agree to a higher interest rate. Eligibility will depend on the lender’s terms and requirements.
They increase risks for lenders
Younger businesses or businesses with a bad credit score can appear riskier to lenders. As a result, lenders may take certain steps to mitigate risk. Having a low credit score may result in
- A higher interest rate or a set factor rate
- A smaller loan amount
- More frequent payments (sometimes daily or weekly)
Borrowers may not get all the funds they need
The purpose of short-term loans is to help businesses get funding for an immediate need. Typically, because of this, the loans are small. The average short-term business loan is about $20,000. If a small business needs additional funds, they may need to pursue other lending options.
They can have higher interest rates
Short-term loans may also have higher interest or factor rates. Unlike interest rates, factor rates are expressed in decimals, such as 1.2 or 1.5. These decimals translate to about 120% or 150% of the original loan amount. As a result, short-term loans may cost more than the original amount borrowed. Also, unlike traditional interest payments on a loan, typically, factor rates are set and aren’t adjusted as the loan is paid down.
Otherwise, expect short-term loans to have higher interest rates—between 10% and 80% APR, on average, according to Fundera. For short-term loans that still use interest rates, expect them to be considerably higher than traditional long-term loans.
The resources described above are made available to businesses within the United States of America.
COVID-19 relief programs are evolving regularly. Please visit SBA.gov for the most up to date information.
This content is for information purposes only and information provided should not be considered legal, accounting or tax advice, or a substitute for obtaining such advice specific to your business. Additional information and exceptions may apply. Applicable laws may vary by state or locality. No assurance is given that the information is comprehensive in its coverage or that it is suitable in dealing with a customer’s particular situation. Intuit Inc. does it have any responsibility for updating or revising any information presented herein. Accordingly, the information provided should not be relied upon as a substitute for independent research. Intuit Inc. cannot warrant that the material contained herein will continue to be accurate, nor that it is completely free of errors when published. Readers should verify statements before relying on them.
We provide third-party links as a convenience and for informational purposes only. Intuit does not endorse or approve these products and services, or the opinions of these corporations or organizations or individuals. Intuit accepts no responsibility for the accuracy, legality, or content on these sites.