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In 2019, 45% of SMEs used external financing to fund their business, up from 35% in 2018. And within this, . Offering a great alternative to more traditional, long-term funding options, short term loans can be incredibly valuable to businesses of all sizes, across many sectors.
So what do you need to know to find the right quick business loan provider for your company?
Let’s dive in…
What Is A Short Term Business Loan?
Short term, or quick business loans, are a good option if you need extra capital with a fast turnaround. Unlike a traditional loan, which is typically paid off over a few years, short term loans are typically structured so you pay them off in 12 months or less. They also tend to be for smaller amounts, making them ideal for covering unexpected shortfalls or dips in cash flow.
Types of Short Term Business Loan
The four most common types of short term or quick business loan are: term loans, asset financing, invoicing financing and lines of credit. Let’s explore each in more detail…
Term Loans
Term loans are for a fixed amount and need to be repaid within a fixed timeframe. They can either be secured (backed by an asset) or unsecured, depending on the loan provider and your business needs.
Asset financing
An asset finance loan is used to gain access to new or upgraded business equipment. However, rather than buying the goods upfront, a business will lease them for a pre-agreed length of time. This helps companies utilise machinery, vehicles, technology, or any other asset that they can’t afford in full right now.
Invoice financing
Invoice financing enables businesses to borrow money against outstanding accounts receivables (unpaid customer invoices). In this arrangement, the loan provider will agree to ‘buy’ the debts off you, giving you the cash upfront – when the invoice is eventually paid, so too is the loan (plus a small fee). Invoice financing is an umbrella term, covering invoice factoring and invoice discounting, which work similarly but with one key difference: in factoring, the invoice becomes the loan providers responsibility to chase up.
Business lines of credit
A line of credit is the most common type of borrowing mechanism for small businesses. Your lender gives you a maximum amount that you can spend, and if you don’t repay it within the specified timeframe, they’ll start charging you interest.
Benefits
Now that we’ve covered some of the basic types of short term loan, let’s take a look at why this method of funding can sometimes be more beneficial than traditional loans.
Pay less interest overall
- As short term loans are typically paid back in 12 months or less, you’ll likely accrue less interest in total before the debt is paid.
- However, whilst this makes short term loans seem like a no-brainer, you should be aware that you’ll most likely pay more in fees for short term loans.
- Plus, you may also have a very high interest rate (even if it’s only for a brief amount of time).
- So while there is a difference in your interest payments, this shouldn’t be the primary reason you get a short term business loan.
Access your funds quickly
- The beauty of short term loans is their speed and flexibility. You should be able to get cash from most lenders within 24 hours, which is especially helpful when you are responding to an emergency.
Many SMEs can quality
- Short term business loans have less stringent requirements than traditional loans, which is ideal for those with poor or short credit histories.
Risks Of A Short Term Loan
You can’t be fully informed without the full picture. So let’s take a look at the potential risks of short term loans.
High interest rates
- As mentioned previously, short term business loans typically have higher interest rates than traditional loans.
- This will increase your monthly instalments dramatically – don’t sign up for anything you don’t think you can afford to pay back.
Fast-paced instalment plans
- Short term instalment plans can require weekly, or even daily, repayments.
- This can put an unexpected strain on your business if you fail to budget sufficiently.
- Not to mention the stress you’ll be taking on, to keep up with the instalments.
Risk of dangerous debt cycle
- Short term business loans run the risk of putting your company into a debt cycle.
- This could force you to take out new loans to pay off your earlier loans, with your interest payments building each time.
How To Choose The Right Short Term Business Loan
The key thing you’ll need to consider when taking out a short term business loan is how much you plan on borrowing. Of course, you should pick a loan amount that won’t leave you with debt you can’t afford to pay off.
You’ll then want to determine how quickly you can repay the loan. The faster the better in terms of your interest, but make sure you keep things realistic.
Finally, you’ll want to determine the overall amount that you can afford, not just the amount that you need to borrow. This includes fees, interest, and early repayment fees. The APR takes all of these things into account to make things easier for you.
Eligibility For A Short Term Business Loan
To be eligible for a short term business loan you will need to supply or prove:
- Minimum turnover. Your monthly profit will be taken into account to assess how likely you are to meet the agreed repayments.
- How long you’ve been in business. Lenders will be more likely to approve you if your business is older than two years. And businesses started less than 18 months ago may struggle to be approved.
- Collateral. Depending on your credit score, the amount you want to borrow, and the interest rates you’re trying to secure, you may have to stake an asset as collateral.
- Credit scores. There are two credit scores that your lender may consider: your personal credit score and your business’s credit score.
How Short Term Loans Are Affected By Business Credit Score
Short term business loans are much more flexible when it comes to credit scores than standard loans.
If you have a poor credit score, you can offset this by paying higher interest rates and staking collateral. This won’t guarantee that every lender will approve you, but it could increase your chances.
Alternatives
Short term loans are not the only form of quick, flexible funding available to small businesses. You could also make use of a:
Merchant Cash Advance
Merchant cash advances are designed for businesses who make their revenue through credit and debit card sales. Here, you borrow a sum of money from a lender by offering a percentage of your future sales in return. You’ll keep paying these revenue instalments until the total debt has been repaid. The key benefit here is that if you don’t earn, you don’t repay.
Business Credit Card
Business credit cards are another option worth considering. However, they tend to have stricter approval requirements and a longer application process which makes them best suited to established businesses looking to expand and grow.
FAQs
It’s unlikely. Most quick business loan providers have a minimum-age-of-business requirement (12-18 months at the least), which startups simply wouldn’t meet.
Short term business loans tend to have higher interest rates to make it worthwhile from the lender’s point of view. It’s there to offset the greater risk they’re taking.
You can check your business credit score through all major credit bureaus. Dun & Bradstreet, Equifax Business and Experian Business are all great places to get things started.
You can apply for one through your bank, or by applying to specialist online lenders. Some lenders promise a 24 hour pay out, if you need extra capital with a fast turnaround.
Yes, though you will have fewer options to choose from and should expect to pay higher interest rates. Again, this is to offset the higher risk the lenders are taking.
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