Wed. Jun 7th, 2023

Regardless of your reason for needing a short term business loan: having a slow time in your business, just getting started, or need to make sure that you’re cash flow positive, being able to make use of some working capital is going to be a necessity to help your business survive.

Just What is a Short-Term Loan?

Your short-term loans are specifically made to help you with your financing needs RIGHT NOW. For instance, they help to fill in your cash flow gaps, they can help you take care of any unforeseen needs for additional funds, and they can help you to jump on a new opportunity with your business that popped up.

Instead of yanking away your money from another area of business, getting a short-term loan can help you to take care of costs while making sure your daily accounts payable remain intact.

Does a Short-Term Loan Make Sense for My Business?

Short-term loans are often so helpful when it comes to periods of growth, during times of a cash flow fluctuation, or if a need comes up for some seasonal purchasing. If the loan itself places you into a position where you can actually pay the loan back in a timely manner, then getting a short-term loan might be a great fix for your needs.

How Do I Go About Getting a Short-Term Loan for My Business?

The majority of traditional lending institutions are fairly conservative in their practice of lending, which means that many small business owners end up with very few places they can try to get their much needed working capital. Often you’ll find that these loans are given as a line of credit with an option to pay interest only with the principal payoff at a very specific time down the line, anywhere from 3 months out all the way to a year or longer.

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There are some lenders, however, that do offer newer ways to get the much needed working capital. They set up the loan so that you can draw from it as often as you need to (with certain restrictions), and paying off the loan faster than planned won’t hit you with any early payment fees. These are the types of loans that you’ll want to jump on when you see them, but they can be hard to find.

Do Short Term Loans Work?

Sometimes your company is in dire need of cash sooner than you can come up with it. But can you really get funding that quickly?

Let’s simply take a better look at how these smaller short term loans may make an impact, and whether or not they can work for your needs.

When Can a Short Term Loan Help You?

Anyone who runs a small company understands: it takes money to create more money.

That makes accessibility to operating funds essential, whether you’re just getting started or have huge ideas to increase your current enterprise.

In reality, just about every single business wants additional operating funds every so often. When that’s the situation, a short term loan may be the most useful choice for your business.

Let’s Take a Look at Some Examples

Example 1
Your current provider of X wants to be compensated in a week, but you don’t have the funds available. Now imagine you are given the chance to fill a huge purchase to get a customer who is able to pay you in 60 days? Without access to currently available funds, you may need to pass up that chance that looks like a golden opportunity.

But by going out and getting a short term loan, you can get the funding you require to fill that order, and then you can pay the loan down when you get paid on that order.

Example 2
Imagine that you run a seasonal company that wants an influx of money just prior to their vacation period.

Finding a short term loan would provide you with the funding to protect promotional expenditures ahead of the holidays even though you may be a bit lacking in funds right now.

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Additional Examples
Other companies might see that this is a powerful way to invest in company growth, refinance other short term debts with better rates, handle forthcoming taxes, place added funds into their enterprise to make the most of new options, or fulfill just about any short term funding need that might arise.

Looking at How a Short Term Loan Works

These kinds of loans actually end up working just like your more traditional loan terms. They tend to be pretty straight forward.

You’ll be given a specific sum of upfront cash, and you’ll agree to pay this back over a specific set of time with interest and fees.

However, in terms of the short term loan, the amount you’re getting might actually be tinier and the time for repayment is often much shorter. Also, the interest rates may be considerably higher, and instead of a monthly repayment schedule you’ll end up making payments weekly or even daily.

However, the upside is that they do tend to be easier to end up qualifying for, the application process tends to go faster, and the funding tends to be faster as well. Just remember that a short-term loan is going to be one of the priciest loans you can get as a small business owner.

While there are plenty of times where these will be the best option for you, you’re always going to want to try to get the loan with the least cost to you. Make sure to do plenty of research, try applying to more than one kind of loan, and be sure to have a repayment plan in place to get any short-term debt paid back quickly.

What’ll Be the Cost to You In Getting Your Short-Term Loan?

These are loans that are paid off very fast, often with a payment every day. You won’t have to worry about having this debt for a long time. However, paying back a short-term loan daily or weekly might seriously carve out a chunk of your cash flow.

Many times these loans will also have a factor rate in place of an interest rate. These are numbers that are multiplied by the overall loan amount to get the actual number that you will need to pay your lender back. It can be a bit confusing, but don’t worry. I got you. Let’s take a look at a quick example below.

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An Explanation of the Short-Term Loan Factor Rate

Let’s use the example of a $100,000 short-term loan with a 1.15 factor rate. You multiply the factor rate of 1.15 by the $100,000 loan amount to get the total repayment amount: $115,000.

Next we will go ahead and make the assumption of a 12 month repayment period, which is fairly common with a short-term loan.

Assuming daily payments and 22 payment days in a month, that will be 264 payments that you’ll need to end up making.

With me so far? Great. So how much will you need to be paying on this loan amount every day? Just take the total repayment amount ($115,000 in this example) and divide it by your total payment days (264). So $115,000 divided by the 264 payment days will give us a daily payment of $435.61, which gives you an APR that is a fair bit higher than a traditional loan.

Why the Increased Cost with a Short Term Loan?

You’re going to have a higher price tag with a short-term loan. Why is this the case, you might ask.

Well, basically you end up paying for convenience and speed. Getting funds quickly is more expensive.

These shorter terms with higher rates typically have much less paperwork and are funded much faster than your traditional loans.

That more expensive debt is often a better option than having no debt at all if you need that cash flow to jump on an opportunity, after all. If you know you can afford to pay this back, that is. Even though they’re more expensive, that doesn’t mean they’re a bad option. Many times they can be just what you need to help your business grow.

Also, your short-term loans have the ability to be refinanced into something more long-term in the future, assuming that the finances of your business improves, of course.

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