What is a short‑term business loan?
Short-term business loans typically must be repaid within 12 months, although some terms might extend to 18 or 24 months. They are typically offered by alternative online business lenders, but some banks and credit unions might also offer short-term business loans.
Short-term loans are generally intended to act as stopgaps for issues such as seasonal purchasing, emergency expenses and payroll shortfalls. They often have higher costs than their longer-term counterparts. Funding often comes much faster, with the approval-to-funding process sometimes taking place within a business day.
How short-term business loans work
Short-term business loans work similarly to other loans. You receive cash and repay the loan over time with an extra charge (usually referred to as interest, although some types of business loans use a factor rate). Short-term loans are considered fast cash, so you might receive approval in minutes and could even get your funding within one business day.
Payments are usually made on a weekly or monthly basis. Some types of short-term financing, such as a merchant cash advance, might be repaid with daily payments. When applying for a short-term business loan, pay attention to how often the lender expects you to make payments.
You can often expect to repay the loan within 12 months, although some lenders have terms of up to 24 months. No matter whether you have a term loan, a business line of credit or revenue-based financing, you usually can expect no more than 24 months to repay a short-term business loan.
What is revenue-based financing?
Revenue-based financing is a type of short-term business loan that depends on your sales. For example, a merchant cash advance or invoice factoring is often issued based on your accounts receivable or sales records. You might repay your loan using a percentage of your daily sales or through weekly payments.
Additionally, if you have accounts receivable but haven’t been paid, revenue-based financing might help. You can provide your invoices, and perhaps get a short-term loan based on what’s due. It helps ease the cash crunch, and often the financing often comes quickly, although you might need to pay a fee and make daily payments based on your sales income.
When a short‑term loan makes sense
Because a short-term loan often comes with a higher cost, carefully considering whether it’s the right move for your business is important.
Short-term business loans often work well when you need fast funding. If you face a payroll shortfall or an emergency comes up, a short-term loan can streamline your cash flow and make sure you have the capital you need to keep the business going.
On the other hand, a short-term business loan might not make sense if you have enough cash to cover an emergency and manage the costs of your daily operations. Procuring capital to expand your business or purchase equipment might take more time, but business financing for those types of expenses usually costs less. If you’re concerned about the cost of short-term business financing and you have cash available, choosing a longer-term low-interest business loan (which could take longer to approve) might make sense.
Pros and cons of short-term business loans
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