What is a short-term business loan?
Short-term business loans are loans that are meant to address immediate business needs like unexpected expenses or gaps in cash flow, and also opportunities to grow your business that may arise suddenly. They are generally structured as lump sums of capital that you pay back over a set period of time, or term. These loans typically have repayment terms of one year or less — although some lenders may offer terms of up to 18, or even 24, months.
How do short-term business loans work?
Short-term loans are usually repaid on a daily or weekly basis, meaning you’ll make larger, more frequent payments than you would with a long-term business loan.
These loans are most often issued by online lenders, which offer fast funding and streamlined applications. Compared with bank or Small Business Administration lenders, short-term lenders typically have more flexible qualification requirements and may work with startups or businesses with bad credit.
As a result, however, short-term business loans generally have higher interest rates than longer-term loans or more traditional financing options. Interest rates can range from 10% to 99%.
Types of short-term business loans
Here are some of the most common types of short-term business loans:
Loan type | Overview | Use cases |
Term loan. | Lump sum of capital you borrow from a lender and repay, over a set period of time, with interest. | Short-term expenses, specific projects or purchases. |
Line of credit. | Gives you access to a set amount of funds which you can draw from as needed. You only pay interest on the funds that you draw. | Working capital, cash flow gaps, seasonal slows, emergency funding. |
Invoice factoring. | Unpaid invoices are sold to a factoring company at a discount in exchange for a cash advance. The company then assumes responsibility for collecting payment from your customers. | Business-to-business companies that have cash tied up in unpaid invoices. |
Merchant cash advance. | Company gives you an upfront sum of capital that you repay using a percentage of your debit and credit card sales, plus a fee. | Businesses that have substantial debit and credit card sales. MCAs can have extremely high APRs, however, so they should be used as a last resort option. |
Pros and cons of short-term business loans
Pros
Wide range of uses. Short-term business loans typically don’t have restrictions on the ways you can use them. Because these loans have short repayment terms and fund quickly, however, they’re often best suited for immediate or unexpected expenses.
Quick to fund. If you need a fast business loan, some short-term lenders can provide financing in as little as 24 hours. And compared with bank lenders, which may take weeks to process your application, short-term business loans are often funded within a matter of days.
Streamlined applications. Most short-term business loans are issued by online lenders, which typically offer streamlined applications. You can usually complete and submit an online application in a matter of minutes, with minimal documentation required.
Flexible eligibility criteria. Short-term lenders generally have more lenient qualification requirements compared with more traditional business lenders. Startups or businesses with bad credit may be able to qualify for a short-term business loan.
Cons
Can be expensive. Short-term business loans typically have higher interest rates and fees compared with long-term loans. Business bank loans, for example, have annual percentage rates that range from 5.89% to 12.23% whereas short-term loans have rates that range anywhere from 10% to 99%.
Frequent repayments. Short-term lenders often require payments daily or weekly as opposed to monthly. This means you’re making larger, more frequent payments over a shorter term. For some businesses, this payment schedule can impede cash flow and can be difficult to manage.
Confusing contracts. Not all short-term lenders present interest rates and repayment terms in the same way — which can be confusing when you’re trying to compare products and determine the total cost of your loan. Although some lenders use APR, others might offer a simple interest rate, or even a factor rate. You should always calculate these rates (and fees) into an APR, as this is the best way to understand how much the loan costs.
Risk of debt trap. The speed and ease of qualifying for some short-term business loans can be problematic if you can’t keep up with your payments. When these daily or weekly payments cut into your cash flow, you may feel the need to take out another loan or refinance in order to repay. With high interest rates and frequent repayments, this cycle of debt can be difficult to break.
» MORE: Estimate loan costs with NerdWallet’s business loan calculator
How to get a short-term business loan
You can follow these steps to get a short-term business loan:
1. Assess your financing needs
You’ll want to think about how much funding you need and what you want to use it for. You’ll also want to consider what type of business loan is right for you. In addition to term loans, business lines of credit and invoice factoring are common forms of short-term financing.
Since short-term business loans have more frequent payments and higher interest rates, you’ll want to make sure your business can afford any debt you take on.
2. Evaluate your qualifications
Although short-term lenders often have flexible business loan requirements, you’ll want to know where your company stands before applying. You can check your credit score, time in business and annual revenue — as many lenders use these three criteria to evaluate your loan application.
3. Find and compare lenders
Once you have an understanding of your funding needs and qualifications, you can explore lenders to find the best choice for your business.
As you compare different options, you’ll want to consider factors such as loan offerings, interest rates, fees, repayment terms, application process, funding speed, customer service and lender reputation.
4. Submit your application
Short-term lenders typically offer a streamlined, online application that can be completed fairly quickly with minimal documentation. Although business loan application requirements vary by lender, you may be asked to provide:
Business and personal tax returns.
Business and personal bank statements.
Business financial statements, such as a profit and loss statement.
Short-term lenders don’t usually require physical collateral to secure your loan, but you’ll likely have to sign a personal guarantee. Your lender may also take out a general lien on your business assets.
5. Close your loan
Before you sign a business loan agreement, you should compare all loan offers you receive to make sure you’re getting the best deal for your business. You’ll also want to thoroughly review the agreement and make sure you understand the repayment terms, interest rate and additional fees. If you have any questions, you should ask the lender for clarification before signing.
Find the right business loan
The best business loan is generally the one with the lowest rates and most ideal terms. But other factors — like time to fund and your business’s qualifications — can help determine which option you should choose. NerdWallet recommends comparing small-business loans to find the right fit for your business.
Short-term loans can also be useful for small businesses that have difficulty qualifying for other types of financing, such as startups or businesses with bad credit.
