A short-term business loan is a type of term loan where a lump sum is paid out to a borrower by a lender, which is then repaid over a set period of time with added interest.

Short-term business loans are specifically designed for immediate funding needs and the ?short-term? refers to repayment terms that range from a few months up to a few years.

How do short-term business loans work?

As with any type of term loan, a short-term business loan works by a lender providing a borrower with a fixed sum of money, that is then repaid over a set period of time in monthly, weekly, or even daily installments, depending on the loan amount and the lender.

Why would a business need a short-term loan?

There are a number of reasons why a business may need to take out a short-term loan, all of which fall under an immediate need:

• to maintain cash flow
• to cover inventory costs
• to hire seasonal staff
• to cover emergency repairs, such as broken equipment
• marketing/advertising
• to cover seasonal income fluctuations
• to build up a good business credit score

How long is a short-term business loan?

A short-term business loan typically lasts anywhere between 3 months and 3 years, depending on the lender and the loan amount.

Short-Term Loans vs Long-Term Loans

Short-term loans and long-term loans are both types of term loans, but, as you can guess, they vary greatly in terms of the repayment period and loan amounts.

1. Short-Term Loans

Short-term loans offer smaller amounts than long-term loans as they are designed to be used for immediate financial needs. They give the borrower less time to make repayments than with a long-term loan and the high interest rates reflect this. However, you can typically secure funding in only a few days, or sometimes less, which is not true of long-term loans.

2. Long-Term Loans

Long-term loans, on the other hand, are specifically designed to be used for larger investments, with larger loan amounts, which is why they have much longer repayment terms, ranging from 1 year right the way up to 25 years. Long-term loans have lower interest rates than short-term loans, but it can take much longer to receive funding, sometimes even a few months after an approved application.

What are the different types of short-term business loans?

Term Loans

This is the type of loan that has been described above. These are generally not offered by traditional lenders, such as banks, as their repayment terms are much longer, so your best option is to find an online lender. Depending on your credit score and which lender you decide to go with, interest rates can range anywhere from 8% to a huge 99%. If you can only qualify for this type of loan with very high interest rates, you will be better off considering alternative short-term business loan types.

1. Lines of Credit

A line of credit provides you with a sum of money that you can draw from whenever you need to, as long as you don?t exceed the credit amount. Most lines of credit will come with long repayment terms, but you will find that some online lenders offer a short-term line of credit if you feel that this is best for your financial needs. Interest rates for lines of credit range between 8% and 80%, with short-term lines of credit likely to be on the higher side.

2. Invoice Financing

Invoice financing is a specialized loan type for businesses that use invoices to collect their payments. If you haven?t yet received payment after sending out an invoice, you can use an invoice financing company to receive an advance for the invoice amount which will then be given back to you, upon payment by the client or customer, with the financing company?s fees deducted. Interest will be added depending on how long it takes your customer to pay the invoice, the amount of which will depend on the invoice amount, the lender, and your creditworthiness. Generally, interest rates fall somewhere between 13% and 60%.

3. Business Credit Card

A business credit card is much like a line of credit, except you pay off the balance you have used every month. Interest rates tend to be below 30%, but you will be able to find some that offer interest rates of around 15%. You will even be able to find some that offer introductory promotions of 0% APR so that you can get about a year of paying off your credit card debt interest-free. If you are able to make your payments on time and in full, business credit cards are a great way to build up your credit score for when you apply for better financing options in the future.

Can I get a short-term business loan with bad credit?

Although many lenders will require you to have a credit score of at least 550, you will still be able to qualify with some online lenders if you have bad credit. You should be aware though, that a bad credit score often means you are given higher interest rates, so it is best to build your credit as much as you can before applying for any type of business loan.