Short-Term Business Loans: The Top Pros and Cons to Consider
Due to strict requirements, you may not qualify for traditional bank financing, so you may want to consider applying for a short-term business loan. Alternative lenders and the Small Business Administration (SBA) offer short-term business financing options to small business owners.
Every small business is different, so business financing will never be “one size fits all.” A short-term loan that might benefit another business might not be the right option for your company.
Therefore, before starting the funding process, you should review the pros and cons of applying for a short-term small business loan. By doing this, you can determine if repaying a loan over a short period is right for your business.
What Are the Pros and Cons of Applying for Short-Term Business Loans?
To start, it’s crucial that you understand what constitutes a short-term business loan. Usually, business lenders consider short terms to be 6 and 18 months. If the term is longer, it’ll be considered a medium or long-term loan.
Below, we’ll examine this loan option’s most notable pros and cons so you can determine if it’s the best type of financing for your business needs.
Pro: You’ll Receive Your Loan Quickly
The most obvious benefit of a short-term business loan is that it can provide you with fast capital, usually in just a few business days. If you have emergency expenses or other immediate funding needs, you can get a short-term loan quickly.
In addition, a short-term business loan application is typically shorter than a traditional bank loan application. This can be incredibly useful if your business can’t afford to wait on a lengthy approval process.
Con: These Loans Come with High-Interest Rates
Since the application process is much more lenient than financing alternatives, most short-term business loans have higher interest rates. Compared to loans with longer terms, you may end up paying significantly more for the same loan amount.
The best way to minimize the total cost of securing working capital is to repay it as quickly as possible. This can be especially crucial if your financial institution provides an early repayment discount.
However, you should also ensure that the lender doesn’t have prepayment penalties. If you pay off the loan early, you may get charged an additional fee.
Pro: The Loan Application Process is Simple
As we previously mentioned, short-term loans offer a shortened application process. In addition, it will likely be easy to complete. These loans require relatively little paperwork, and the applications can usually be completed online. If you have any questions, contact your business loan lender.
Con: Frequent Payments Are Required
A notable drawback of applying for a short-term business loan is that most of these loans require frequent payments. In fact, many of these loans require weekly or even daily payments. You should consider other loan options if your business lacks consistent annual revenue sources. That way, you can pursue financing options that offer more flexible repayment terms (preferably a monthly payment schedule).
In addition, if you cannot make frequent payments, you may qualify for trade credit. With this financing option, you can buy items on credit and pay the supplier at a later date. It’s still considered short-term financing but functions differently than a traditional short-term loan from a lender.
Pro: Easy to Qualify for
Most short-term business loans have remarkably high approval ratings compared to traditional business financing options. Even if your small business has a limited or bad credit history, you still could qualify for a short-term loan.
The business loan lender will still want to review your personal and business credit scores. However, their financing requirements probably won’t be as stringent if you have a good credit score.
You may need to apply for a secured loan if you have poor credit. The lender will ask you to submit collateral to ensure you repay the loan. If you cannot pay off your loan, they’ll collect the collateral in exchange.
Although this will help you receive financing, it’s essential to consider what will happen if you lose the collateral. For instance, losing business equipment could make it difficult for you to run your operations.
Con: There’s the Potential for Significant Debt
It’s important to note that regardless of the financing product you select, acquiring any business debt is inherently risky.
Generally, you should only apply for a loan if you believe you can repay your debt on time. Otherwise, your business risks getting caught in a “cycle” of debt payments. This could be hard on your bank account and jeopardize your business’s future.
Conclusion: Is a Short-Term Business Loan Right for You?
Short-term loans can help reduce cash flow gaps, but they also have drawbacks.
Before submitting a loan application, your business should consider all available options. For example, a short-term loan may not be your best option if you can qualify for a low-interest loan.
However, despite these risks, short-term loans can be helpful to your business. Your business may benefit from a short-term business loan if:
- Your company has relatively quick cash flow cycles
- You have a reliable method for repaying your debts
- You’ll benefit from an immediate capital infusion
Whether it makes sense to apply for this loan depends on your business’s specific conditions and characteristics.
Editor’s Note: This post was updated for accuracy and comprehensiveness in June 2022.
Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.