Most small businesses will need to take out a loan at some point. Whether it’s to cover cash flow gaps, invest in new equipment, or jump on a sudden business opportunity, having credit available can make a huge difference in the success of your business.
Business owners have many funding options – term loans, SBA loans, lines of credit, cash advances, business credit cards, and more. One popular option is taking out a short term business loan.
A short term business loan is a lump-sum loan taken out for a relatively short period. There is no “official” term that qualifies as “short”, but generally speaking, loans from around 3 months to 2 or 3 years are often considered short term.
Short term loans are a popular option for several reasons. For one, they can be issued and funded quickly, allowing firms to jump on business opportunities. They also don’t lock companies into decades of payments, making them attractive for newer companies who don’t have a clear idea of their future revenues. And finally, they are generally far cheaper than credit cards, or even lines of credit in some cases.
Pros & cons of a short term business loan
When exploring any sort of funding option, it’s wise to compare both advantages and disadvantages. This section explores the pros and cons of short term loans, and how they compare against other small business loan types.
Check out our complete guide to Small Business Loans
Advantages of a short term business loan
Rapid funding
Unlike large, long-term loans, short term loans can generally be approved and funded rapidly. Some online lenders can get funds to your business in just a few days – which is a huge difference compared to the weeks or even months it can take to get funded with traditional bank loans. For short-term opportunities, firms often need to move quick – and these loans help enable that nimbleness.
Lower requirements
Some short-term loans have fewer requirements for businesses, compared to larger traditional loans, SBA loans, etc. Generally, these requirements come in the form of personal credit score, business credit score, monthly/yearly revenue, and time in business. Most issuers require at least 6 months to 1 year in business, with proof of revenue, but these requirements are lower than many loan types.
Predictable costs
Term loans come with set daily, weekly, or monthly payments. You get a lump sum upfront and pay it off over a set period of time in a predictable, set way. The repayment period is usually a few months to a few years. This helps entrepreneurs meet their financial business needs while having stable and predictable costs.
Builds business credit profile
Taking out a short-term small business loan and making on-time payments can help strengthen your personal credit and your business’ credit profile. This helps give your business credibility, and also makes it far easier to get approved for loans in the future.
Cheaper than alternatives
Short-term loans are often cheaper (in the form of lower APRs and fewer fees) than some alternatives. For instance, some small business owners might reach for their business credit cards in order to fill short-term financing needs. However, credit cards offer far higher interest rates. Other financing options, like merchant cash advances, invoice financing, or a business line of credit, can be cheaper or more expensive – this depends largely on the business’ credit rating. Be sure to consider total cost, including loan application fees and other expenses, when comparing different loan styles.
Disadvantages of a short term business loan
Collateral requirements
Many term loans require the applicant to put up some form of collateral, usually in the form of an asset that the lender can sell if the borrower defaults. Others require a personal guarantee, which ties your personal assets to your business loan.
Limited flexibility
Term loans have set payment requirements (daily, weekly, or monthly). Payments generally begin immediately. While this does provide a predictable cost schedule, it also limits flexibility in some ways.
Higher APRs
Shorter-term loans may have higher APRs than longer-term loans for similar applicants. Most lenders prefer longer-term loans, as they lock in profits for years to come; thus, short-term options are sometimes more expensive.
What to look for in a loan provider
1. Competitive interest rates
Interest rates (APR) can make a huge difference in the long-term costs of business financing. Even a relatively small difference in APRs can make a substantial impact on total costs. Be sure to compare different providers to ensure you’re getting a good deal. Interest rates vary hugely, depending on creditworthiness and loan size/style – from as low as 6% to as high as 99%.
2. Range of loan terms
How “short term” do you need? Most lenders that offer term loans have minimum term lengths of 3 months to 12 months. Most have a maximum length of a few years. Be sure to look for a term that fits your needs – and also look into prepayment penalties, should you decide to pay off the loan early.
3. Competitive fees
All business loans will have some fees associated with them, in addition to the interest charged. Application fees and origination fees are universal, but the actual size of these fees varies substantially. Prepayment penalties are important to watch out for, as well – some lenders penalize you if you try to pay off the loan ahead of schedule. Compare fees closely, but also consider APR and total cost – you likely want to avoid choosing a lender with lower fees, but a higher APR.
4. Maximum loan amount
How much funding do you need to meet your business goals? Short term loans are generally small to medium-sized, but there is quite a range depending on the loan provider. Typically, the minimum amounts are around $5,000 to $25,000, and the maximum amounts are around $100,000 to $250,000. Some issuers offer far higher limits, however. Applicants should keep an eye on maximum loan amounts, but should also be realistic about the likelihood of getting approved for larger loans.
5. Customer service
You should look for a loan provider or bank with a good reputation, and good marks for customer service. If you have an existing relationship with a bank, that may be a good place to start – but be sure to check their terms and interest rates closely. For online lenders, you can read through customer reviews to get a feel for the overall reputation of a company.
Best short term business loan providers
Short term business loans are available from online lenders, local banks, credit unions, and other financial institutions. While it pays to shop around, online lenders often offer the best value, as they have lower costs. Some of the best short term business loan options are listed below. The recommendations are based on a combination of loan requirements, available interest rates, minimum/maximum loan amounts, and other key factors.
Rapid Finance
Rapid Finance is a loan issuer for small businesses, providing term loans, lines of credit, SBA loans, and more. Their wide variety of financial solutions makes them a good choice for businesses of all shapes and sizes. Loans can be issued for as little as $5,000, and as much as $1 million. In fact, Small Business Administration (SBA) loans can be issued for up to $5.5 million (although SBA loans are not typically used for short-term loans).
Rapid Finance provides fast approval and even faster funding. Once you’re approved for a loan, funds are transferred within just a few hours. You can get a loan for as short as 3 months, or as long as 5 years, making Rapid Finance a very versatile choice.
Rapid Finance details
- Short term business loans from $5,000 to $1 million
- 3 month to 60 month terms
- Also offers Small Business Administration loans (generally for longer-term loans)
- Offers many other financial products
- Requirements for applicants vary depending on the type of loan
- APR varies depending on credit history and loan type
Advantages
- Terms from 3 months to 55 years
- Rapid approval and funding
- Secured and unsecured loans available
- Flexibility in repayment terms
- Wide choice of loan size and term length
Disadvantages
- Some loan products carry more stringent requirements
- Rate transparency is limited – you must start the application process to see rates
Biz2Credit
Biz2Credit is a popular online loan provider for businesses of all sizes. They have helped more than 20,000 small businesses achieve their goals, by funding more than $3 billion worth of loans. They offer terms between 12 and 36 months, making them a great choice for short- and medium-term small business loans.
The application process for Biz2Credit is simple and fast. In fact, you can get approved and fully funded in as little as 72 hours. Compare that to the weeks-long process at a traditional bank, and you can see why so many entrepreneurs are choosing Biz2Credit for their financing needs.
Biz2Credit details
- Short term business loans from $25,000 to $250,000
- Loan lengths from 12 months to 36 months
- APR as low as 8.99%
- Requires minimum credit score of 660
- Most applicants have 18+ months in business
- Most applicants have $250k in annual revenue
Advantages
- Rapid funding – as quick as 72 hours
- Approval in as little as 24 hours
- Competitive rates
- Excellent customer ratings and reviews
- A great option for short- to medium-term loans
Disadvantages
- Relatively low maximum loan amount
- The shortest loan option is 1 year
OnDeck
OnDeck is a large scale provider of small business financing products. They have served thousands of small businesses, and have currently funded more than $13 billion in loans. Over their years in the industry, OnDeck has earned a stellar reputation, with a 4.9/5 star TrustPilot rating, and an A+ rating with the Better Business Bureau.
OnDeck specializes in short term business loans, making them a great fit for firms looking for rapid, short- to medium-term funding. They are also a good choice for business owners with moderate credit, as they have lower credit requirements than many lenders.
OnDeck details
- Short term business loans of $5,000 to $250,000
- Loan terms from 3 months to 18 months
- Minimum credit score of 600
- Estimated APR from 9.9% to 99%
- Requires minimum of 1 year in business
Advantages
- Unique loyalty program rewards repeat business
- Available to those with moderate credit scores
- Transparent fees and pricing
- Less paperwork, and quicker than many lenders
- Good option for quick working capital and loans
- No prepayment penalties
Disadvantages
- Limited selection of loan types
- Frequent payments required
- Requires a personal guarantee and a business lien
BlueVine
BlueVine is an online provider of loans, lines of credit, and even business checking accounts.It aims to provide a one-stop-shop for newer companies looking for financial services. If you’ve recently started a business, BlueVine’s checking account is well worth looking into – it earns 1% interest on up to $100,000, there are no fees, and it comes with other useful perks.
BlueVine’s loans are also attractive, particularly for newer companies. They require businesses to have only 6 months of history, rather than the 1-3 years required by most lenders.
BlueVine details
- Short term business loans of up to $250,000
- Rates as low as 4.8%
- Terms from 6 months to 12 months
- Minimum credit score of 600
- Requires $10,000 in monthly revenue and 6 months of business history
Advantages
- Firms require only 6 months of business history to apply
- Low revenue requirement ($10k/month)
- Fast funding
- Also offers rewards checking and other financial products
Disadvantages
- Requires a personal guarantee
- Shorter-term loans generally have higher interest rates
Funding Circle
Funding Circle is a popular option for business loans, having served more than 90,000 clients so far (and having issued more than $12 billion worth of loans). Terms are flexible, funding is fast, and requirements are relatively low.
The main selling point of this service is its flexibility. You can get a loan for as short as 3 months, or as long as 10 years – making it one of the most versatile loan options on this list. In addition to standard term loans, Funding Circle also offers specialty products, including Small Business Administration loans.
Funding Circle details
- Short term business loans from $5,000 to $500,000
- Estimated APR between 12.18 and 36.00%
- Term options from 3 months to 10 years
- Minimum credit score of 660
- No revenue requirement
Advantages
- There is no specific revenue requirement for applications
- Versatile selection of loan products and loan terms
- Application is quick and straightforward
- Fast funding if approved
Disadvantages
- Loans require a personal guarantee and business lien
- Potentially higher rates for some borrowers