Short-Term Business Loans: The Top Pros and Cons to Consider - FF Blog
Short-Term Business Loans: The Top Pros and Cons to Consider
November 17, 2021

Short-Term Business Loans: The Top Pros and Cons to Consider

One of the most important components of running a business is finding ways to effectively allocate capital. With a sound financial plan, your business can minimize costs and maximize potential growth.

If you can’t get approved for bank financing, you may want to consider applying for a short-term business loan. Alternative lenders and the Small Business Administration (SBA) both 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 type of financing that might be beneficial to another business might not be the right option for your company.

Due to this, you should review the pros and the cons of applying for a short-term small business loan. By doing this, you can determine if repaying a loan over a short period of time is right for your business.

What Are the Pros and Cons of Applying for Short-Term Business Loans?

To start, it’s important that you understand what constitutes a short-term business loan. Usually, lenders consider short terms to be 6 and 18 months. If the term is longer than that, it’ll be considered a medium or long-term loan. Below, we’ll examine the most notable pros and cons of this financing option so you can determine if it’s the right loan type for your business.

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 a matter of just a few business days.

In addition, a short-term business loan application is typically shorter than that of a traditional bank loan. This can be incredibly useful if your business can’t afford to wait on a long 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. When compared to loans that have 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.

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, be sure to contact the business loan lender you’re applying with.

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Con: Frequent Payments Are Required

A notable drawback of applying for a short-term business loan is that most of these loans require very frequent payments. In fact, many of these loans require weekly, or even daily, payments. If your business doesn’t have a consistent annual revenue source, you should consider other loan options. That way, you can pursue financing options that offer more flexible repayment terms (preferably a monthly payment schedule).

In addition, if you’re unable to 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

When compared to more traditional business financing options, most short-term business loans have remarkably high approval ratings. Even if your small business has limited or bad credit history, you still could qualify for a short-term loan.

The business loan lender will still want to review both your personal credit and business credit scores. However, their financing requirements probably won’t be as stringent if you have a good credit score.

If you have poor credit, you may need to apply for a secured loan instead. To ensure you repay the loan, the lender will ask you to submit collateral. If you’re unable to pay off your loan, they’ll collect the collateral in exchange.

Although this will help you receive financing, it’s important 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 sort of business debt is inherently risky.

Generally, you should only apply for a loan if you believe you can repay your debt in full and on time. Otherwise, your business risks getting caught in a “cycle” of debt payments. This could be hard on your bank account and ultimately jeopardize your business’s future.

Conclusion: Is a Short-Term Business Loan Right for You?

Short-term loans can be a beneficial way to reduce cash flow gaps, but they also come with drawbacks.

Before submitting a loan application, your business should consider all available options. For example, if you can qualify for a low interest loan, a short-term loan may not be your best option.

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 business 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 type will depend on the specific conditions and characteristics of your business.

Of course, a short term loan isn’t your only financing option. If you’d like to learn about other financing terms, check out our guides on long term loans and intermediate term loans.

Editor’s Note: This post was updated for accuracy and comprehensiveness in November 2021.

Fora Financial

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.

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Fora Financial is a working capital provider to small business owners nationwide. In addition, the Fora Financial team provides educational information to the small business community through their blog, which covers topics such as business financing, marketing, technology, and much more. If you’d like to see a topic covered on the Fora Financial blog, or want to submit a guest post, please email us at [email protected].