Owning and operating a business comes with as many opportunities as challenges. One of the most pressing issues for companies large and small is finding and securing financing for short-term business needs.
Without access to funding from a lender or investor, businesses can face financial hardships that could lead to closing their doors — and the slightest hiccup can turn into an emergency overnight. However, not all businesses meet the necessary qualifications to get a traditional bank loan, or if they do, the long-term repayment requirements may not meet their needs.
Keeping the lights on and operations running smoothly often requires some form of short-term financing. Cash emergencies can happen at any time, and short-term business loans are a solution to help owners fill in the cash-flow gap. There are several lenders that offer short-term business loans for small companies, each with varying repayment terms, fees, and interest rates.
In this guide:
- Best Short-Term Loans for Small Businesses
- What Is a Short-Term Loan?
- Short-Term Loan Interest Rates: What’s It Going to Cost?
- Types of Short-Term Business Loans
Best Short-Term Loans for Small Businesses
Business owners have several options when looking for short-term loans or business lines of credit to cover a shortage of working capital, and most lenders offering these financing solutions accept applications online. Eligibility will depend on how creditworthy the business is, but even businesses with bad credit can be approved if they’re willing to accept higher rates.
It’s important to compare rates and loan terms from several small business lenders before completing a full application. Here are a few of our favorite lenders for short-term business financing:
Offered as a service from PayPal, LoanBuilder is an online lender providing short-term loans to businesses that have been operating for at least nine months with at least $42,000 in annual revenue. Businesses do not need to have excellent credit to be eligible, and loans can be funded in as little as one business day. LoanBuilder does not charge origination fees, nor does it assess a penalty for paying off a loan early.
- APR Range: Not disclosed
- Loan Terms: 13 to 52 weeks
- Loan Amounts: $5,000 to $500,000
Square Capital is a small business lender designed for companies that use Square to accept customer payments. The lender offers short-term business loans to eligible sellers, and repayment is collected through daily credit card sales completed through the Square platform. Square Capital has a simple application process, funding in as little as one business day, and no compounding interest, origination or loan fees, or prepayment penalties.
- APR Range: Not provided (borrowers pay a flat fee depending on the loan amount)
- Loan Terms: Not provided
- Loan Amounts: $500 to $250,000
OnDeck is a financial services company that focuses on small- to mid-sized companies. Short-term loans offered by OnDeck come with fixed, simple interest rates, and fixed daily or weekly repayment options. Companies with at least one year in business and no less than $100,000 in annual revenue are eligible to apply. Business owners must also have a personal credit score of at least 500.
- APR Range: As low as 9% simple interest up to 12 months (loans with longer repayment terms start at 9.99% APR)
- Loan Terms: 3 to 13 months for short term loans and 15 – 36 months for long term loans
- Loan Amounts: Up to $500,000
Balboa Capital is another option for short-term business loans. The lender uses credit scoring technology and an online application process to provide fast financing to eligible companies. Businesses do not need to provide any collateral or financial paperwork to get approved, and all credit backgrounds are considered. There are no hidden fees, but businesses do need to be in operation for at least one year and have annual revenue of $300,000 or more to qualify.
- APR Range: Not disclosed
- Loan Terms: 3 to 24 months
- Loan Amounts: Up to $250,000
What Is a Short-Term Loan?
Short-term business loans are designed to provide small businesses with the short-term capital they need for expenses other than growth or expansion, such as inventory purchases and employee payroll. Short-term business loans may also be used to pay for utilities and other overhead expenses when cash on hand may not do the job.
Both the repayment term and the amount of available funding is typically much smaller with short-term loans than with conventional business loans. For instance, most short-term business loans are repaid over a period of a few months to a couple of years, and loan amounts are often capped at $500,000. Some lenders also require daily or weekly payments, as opposed to the usual monthly payments you’d find with traditional financing.
There are a few kinds of short-term business loans, each with their own advantages and downsides. However, the loan type that’s right for your business will depend heavily on your funding needs, your desired repayment period, and the costs associated with the loan itself.
Short-Term Loan Interest Rates: What’s It Going to Cost?
Like other financing options, short-term small business loans come with a wide range of interest rates and fees. Lenders may charge as little as 1.5% per month, but rates can reach up to 50% in some cases. The interest rate you pay may be based on the creditworthiness of your business, along with its cash flow, annual revenue, and other assets on hand. The business owner’s personal credit may also be taken into account, as well as the loan amount and repayment term.
>> Read More: How to Establish and Build Business Credit
Types of Short-Term Business Loans
Standard Short-Term Small Business Loans
Most business owners think of standard short-term business loans when considering their options for quick financing. With a standard short-term business loan, you will receive a fixed sum once approved and then repay the loan balance plus interest over a period of three months to 18 months (although some longer-term loans can extend out to two years). These types of small business loans may come with moderate to high interest rates.
For example, getting a short-term business loan from OnDeck for $10,000 may come with a three-month repayment term and a simple interest rate of 15%. Although the cost of borrowing through this type of loan may be higher, funding often happens quickly and businesses do not need to have excellent credit to qualify.
Invoice financing (also known as invoice factoring) is another type of short-term loan available to qualified small businesses. With this strategy, companies sell the current invoices owed them to a company in exchange for a lump sum of cash, usually up to 90% of what they’re owed. The factoring company then collects on the outstanding invoices.
The total fees paid for this type of loan can be relatively high — for example, invoice factoring companies often charge a percentage of the invoices collected, known as the factor fee. These can range from 1% to 5% of the invoice’s face value. Other fees might include application or funding fees, background check fees, monthly processing fees, invoice submission fees, or ACH or wire transfer charges.
However, funding is incredibly fast, which can be beneficial for a business that needs to cover short-term expenses.
Merchant Cash Advance
Short-term business loans may also come in the form of merchant cash advances. With this financing vehicle, lenders offer a lump sum of money in exchange for future credit and debit card sales. Instead of an interest rate, businesses pay a factor rate of future transactions to repay the lump sum received. For example, if your business receives a $10,000 merchant cash advance with a factor rate of 1.25, you repay the initial amount of $10,000 plus $2,500 in fees.
Compared to short-term small business loans and invoice financing, merchant cash advances can be a more expensive option. However, repayment is made through daily credit and debit card sales, and the initial funding can be done in as little as one business day.
Small businesses in need of fast cash have a number of short-term financing solutions to consider, including traditional short-term loans, invoice factoring, and merchant cash advances — all of which offer fast funding and a simple loan application process. As with any loan product, evaluate your options carefully before deciding so that you can save money on fees while also meeting your financial obligations as a small business owner.