How to Get a Short-Term Business Loan
Short term business loans are available for between one month and up to five years. They offer flexible financing for small businesses.
When businesses are looking to borrow money it’s often to help them build and grow over a number of years.
But finance is sometimes needed for more specific reasons, or when there’s a need for quick and flexible finance.
This is where short-term business loans come into play.
What are short-term business loans?
While business loans are typically taken out for anywhere from five to 30 years, most short-term versions are available for anything from one to 18 months.
They are often used as a cash injection to cover particular gaps, help with cashflow or to provide working capital for certain expenses or projects, making them especially popular with smaller businesses still getting off the ground as well as those with fluctuating revenues.
How do short-term business loans work?
Short-term business loans are relatively straightforward to apply for and approval can be granted quickly. This is because the amounts borrowed are often compared to the size of the business and the loans are unsecured, which means the lender doesn’t need to assess the value of any assets that you put up as collateral, such as property.
However, the lender will sometimes ask for a personal guarantee. This is a legal agreement that makes the company director(s) liable for repayments if the business defaults on the loan.
Short-term business loans are generally available from £1,000 to £500,000, although some will allow you to borrow up to £1m.
However, the exact amount you can borrow will depend on a number of different factors, such as the purpose of taking out the loan, the type of business you run, the amount you’re borrowing, your credit history and the length of the borrowing term.
What are the pros and cons of short-term loans?
There are several advantages to short-term business loans. The process of applying for and then receiving the loan can be very quick – you can sometimes receive the cash within one business day. What’s more, the shorter the borrowing term, the less the overall interest you’ll pay. This also means the business isn’t burdened by a debt that takes several years to pay off.
But there is a trade-off between ease of access and cost. In other words, while there are fewer hoops to jump through in the application process, the interest rate will be more expensive than on longer term loans.
Short-term loans are also especially likely to include a penalty charge for repaying the loan ahead of schedule.
How do short-term business loans compare to long-term business loans?
The main differences are the application process, the term length, the amount you can borrow, the lender requirements and the interest charges.
There are other distinctions to be aware of though. For example, unlike many longer term arrangements, short-term business loans very rarely include payment holidays, which means the regular repayments need to be maintained throughout the term.
Choosing between the two types will depend on factors such as what you need the money for, how quickly you need it and what is likely to be most cost-effective. For example, you might want to work out whether the higher interest rate on a short-term loan still works out cheaper than a low interest rate on a long-term loan.
How can I compare business loans to get the best rate?
It’s quick and easy to compare business loans. You can filter the results by term length, loan type, the amount you want to borrow and the APR.
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Don’t forget that there are several different types of loans to look at, including secured and unsecured, credit facilities, P2P loans and the various temporary loans available for businesses needing help getting through the coronavirus crisis.
While the interest rates on longer term deals will usually be shown as the annual percentage rate (APR), short-term loans work on monthly rather than annual rates, so make sure you know exactly what it will cost before you make a decision.
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Jeff is a freelance journalist who writes across finance & business. He was the personal finance editor at The Scotsman & Scotland on Sunday & a member of the Financial Services Consumer Panel. Read more