4 Essential Short-Term Business Loans You Should Be Aware Of

When considering financing options for your business, many entrepreneurs often ask, “What exactly is a short-term business loan?” In simple terms, a short-term loan refers to business funding that needs to be repaid in a relatively brief period, usually between 6 to 12 months. However, in some instances, this term can be extended up to 18 to 24 months. There are various types of short-term business loans, and understanding which option is best for your business is essential to making the right choice.

Let’s dive into the four main types of short-term business funding options that can provide the financial support your business needs.

Understanding the 4 Types of Short-Term Business Loans

Short-term loans can serve as a critical financial tool for small business owners in need of fast capital. These loans are designed to be repaid quickly, usually within a year or less, and can be used for a range of purposes, such as purchasing inventory, upgrading equipment, or boosting working capital. Each type of short-term business loan has distinct features, and understanding these can help you select the best fit for your company’s financial needs.

1. Short-Term Business Loan

 A short-term business loan provides a lump sum of money that must be repaid over a fixed term, typically between 6 to 12 months, although some loans may allow for a repayment period of 18 to 24 months. Repayments are typically deducted automatically from the business’s bank account on a monthly, bi-weekly, or even weekly basis, depending on the business’s cash flow. The repayment rates can vary, including options like principal & interest, simple interest, or factor rates, with the rate determined by factors such as the business’s financial health, time in business, and credit scores.

• Loan Size: $10,000 to $500,000 (can exceed $1 million in some cases)
• Repayment Term: 6 to 12 months (with exceptions for longer periods)
• Payment Frequency: Auto deductions, monthly, bi-weekly, weekly, or daily
• Rates: Principal & Interest rates range from 7.99% to 29%, while factor rates range from 1.18% to 1.45%

What are the Requirements for a Short-Term Business Loan?

To qualify for a short-term business loan, your business typically needs to have been operational for at least six months and show a consistent monthly income of at least $10,000. Lenders generally require a minimum credit score of 500, though higher scores are preferred.

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2. Business Line of Credit

 A business line of credit works similarly to a credit card, offering a revolving credit line that can be accessed as needed. Unlike traditional loans, the credit limit is available continuously, and businesses can withdraw funds at any time without having to wait for approval each time. The repayments are typically lower than those of fixed-term loans, and they can be made monthly, bi-monthly, or weekly.

• Loan Size: $5,000 to $250,000 (potentially more depending on the situation)
• Repayment Term: Revolving credit
• Payment Frequency: Monthly, bi-weekly, or weekly auto deductions
• Rates: Principal & Interest rates typically between 7.99% and 29%

What Are the Qualifications for a Business Line of Credit?

To qualify for a business line of credit, your company should generally have been in operation for at least a year, with monthly sales of $15,000 or more. Lenders also look for a credit score of at least 600, with some requiring a higher score.

For businesses based in Los Angeles, explore small business funding options in the area.

3. Business Cash Advance

A business cash advance provides an upfront lump sum of cash in exchange for a portion of future sales. The repayment amount is based on a percentage of the business’s daily or weekly sales, so repayments fluctuate with revenue. This option doesn’t have a fixed repayment term, offering flexibility if sales slow down.

• Loan Size: $10,000 to $500,000 (with exceptions)
• Repayment Term: No set term
• Payment Frequency: Weekly or daily ACH deductions
• Rates: Factor rates of 1.18% to 1.45%

What Are the Requirements for a Business Cash Advance?

To qualify, a business must have been operating for at least six months and demonstrate consistent sales of $10,000 per month. Credit scores as low as 500 may qualify, though higher scores are typically preferred.

If you’re in the healthcare industry, consider exploring healthcare business loan options for additional support.

4. Merchant Cash Advance

A Merchant Cash Advance (MCA) is a unique type of funding for businesses that rely heavily on credit card sales. In an MCA, businesses receive a lump sum upfront and repay the amount through a percentage of future credit card sales. This funding option is not a loan in the traditional sense, and the repayment amount fluctuates with sales.

• Loan Size: $10,000 to $500,000
• Repayment Term: No fixed term
• Payment Frequency: A percentage of daily credit card sales
• Rates: Factor rates typically between 1.18% to 1.45%

What Are the Qualifications for a Merchant Cash Advance?

The business should have been in operation for at least six months, with a consistent history of credit card sales of $10,000 per month. Credit scores as low as 500 may qualify.

For real estate businesses looking for funding, check out real estate funding options.

Why Opt for a Short-Term Business Loan?

Short-term loans can be a good option for businesses that might not qualify for traditional bank loans, as they have more lenient requirements and faster approval times. These loans are ideal for businesses that need quick access to funds without the long approval process of banks. Additionally, they offer a quicker turnaround, sometimes approving funding within a day.

Conclusion

Choosing the right financing option is a crucial decision for any business. With a clear understanding of the available short-term funding options, business owners can make informed decisions that align with their financial needs. Whether you’re a startup or a growing business, exploring options like small business funding or specific funding for your industry will ensure you select the best path for your company’s growth. Always assess your business’s financial situation and weigh the benefits, costs, and repayment terms to find the best solution.