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- Short-term business loans can be a helpful tool for businesses facing unexpected obstacles or experiencing rapid growth
- Interest rates for short-term business loans can vary greatly depending on the lender, loan type and the borrower’s financial situation
- Short-term business loans typically have a shorter repayment period and may require more frequent payments compared to other longer-term loans
Maybe your business ran into an unexpected obstacle. Or maybe it’s growing so fast that you need to bring on new employees. Business owners can face many situations where a little extra money can go a long way.
That’s where short-term business loans can help. Commonly issued for between $50,000 and $100,000 and paid back in two years or less, these loans can be a game-changing tool for your company.
If you’re considering a short-term business loan, it’s important to know the costs. Let’s look at the factors determining how much a short-term business loan will cost.
Short-term business loan interest rates
Interest is the cost of taking out a loan, expressed as a percentage. What is the interest rate on a short-term business loan? It varies. Even average business loan rates shift depending on your loan type. For example, the rates for a term loan won’t be the same as the interest rates for a business line of credit.
Here’s a look at the main factors influencing short-term business loan rates.
There are a lot of places you can go to get a business loan, but they typically fall into two categories: Traditional lenders (banks and credit unions) and online lenders (alternative lenders).
If you want to shop for fast short-term business loans, online lenders can usually move more quickly to get money into your account. Sometimes, you can get a fast business loan in as little as 24 hours. Online lenders also tend to provide accessible financing options that are an option for business owners with bad credit.
But that speed and accessibility come at a price. Traditional banks can take days or weeks to provide funds to customers. But they generally offer lower rates since they take on less risk, working primarily with business owners with good and excellent credit.
On top of lower rates, banks and credit unions may offer larger loan amounts and longer repayment terms compared to many online lenders. But keep all options on the table. Compare choices from banks and online lenders to find the best loan for you.
The loan type
Short-term small business loans can take a few different forms. Here are just a few examples:
- Term loans. These provide lump sums of cash you pay back (with interest) on the agreed-upon schedule. Rates are usually lower than other types of loans, especially from banks.
- Business lines of credit. These provide revolving lines of cash, much like a business credit card, letting you draw as much as you need up to a maximum amount. Rates and costs for lines of credit are typically higher than term loans.
- Merchant cash advances. This lets you borrow money and then repay it with a portion of your credit card sales. A merchant cash advance is usually a costly, high-risk option that is helpful for emergencies or seasonal changes when you need fast funding that you can repay quickly.
Your financial situation
As with any debt, your history with money plays a role. Lenders look at your personal and business credit history to determine your odds of paying back the loan. The riskier the loan looks to the lender, the more they’ll charge.
That’s not to say you can’t get a short-term business loan if you have bad credit. There are various types of bad credit business loans you can explore. Just be advised that bad credit business loans generally come with higher rates and require more collateral.
Lenders want to have some recourse if you fail to repay your loan. In a lot of cases, that means they ask for collateral. You can put up business collateral like equipment, inventory or real estate. You can also offer assets you personally own, like a car or home. But if you default on the loan, the lender has the right to seize any assets you offered as collateral.
The good news is that collateral can help you secure a lower interest rate and more favorable loan terms compared to unsecured business loans.
Even if your lender doesn’t require collateral, you will likely have to sign a personal guarantee. This means that if your business can’t repay the loan, you agree to step in personally. It also means the lender could seize your personal assets in the event of a default.
Interest rates vs. factor rates
As you’re comparing short-term small business loan options, you might see the cost of the loan expressed in different ways:
- Interest rate. The percentage rate at which your loan will accrue interest.
- Annual percentage rate (APR). The total cost to borrow the money over the course of the year, including interest and fees, expressed as a percentage
- Factor rates. The cost of a loan is expressed as a decimal figure (typically 1.1 to 1.5). To determine the borrowing cost, you multiply the factor rate by the total loan amount. Unlike interest, factor rates don’t accrue over time — they’re fixed for the life of the loan.
Interest and APR are the most common ways to express the cost of a loan. Factor rates are typically found with accessible short-term loans like merchant cash advances and invoice factoring.
Factor rates look smaller than interest rates and APR but can cost more than you think. Convert any factor rates to interest rates to ensure you’re comparing apples to apples when evaluating your short-term business loan options. This will make it easier for you to see which loan is more affordable.
Short-term business loan fees
You’ll also need to watch out for short-term business loan fees.
These vary by lender, but you should absolutely factor them into your calculations when determining if you can afford the loan. You can ask your lender if there are any fees and how much they cost, but keep an eye out for:
- Administrative fees
- Application fees
- Late fees
- Origination fees
- Underwriting fees
- Processing fees
- Packaging fees
All of these are fairly similar, covering the cost for the lender to draw up your loan and issue you the funds.
Other fees you might also be subject to include:
- Underwriting fees to evaluate your business (and possibly personal) creditworthiness
- Annual fees to maintain a business line of credit
- Prepayment penalty fees if you pay off the loan early
When it comes to a short-term business loan, the repayment window is usually fairly short. One year is common, and two years is on the long end. In other words, this debt shouldn’t stick around for long.
If you have a loan with an interest rate, paying it off even faster can help you avoid interest accrual, which adds to the cost of your loan. Check your loan terms first because some lenders charge a penalty fee if you pay off your debt early.
If you have a factor rate, fast repayment won’t necessarily save you money. Remember, the factor rate is set rather than accruing like interest. That said, some lenders offer an early payment discount that might save you a little bit. Read your loan terms to find out if paying your debt off early could save you money.
Pros and cons of short-term business loans
As with any financial product, a short-term business loan comes with perks and drawbacks. Before you apply for one, consider these pros and cons.
- Get money quickly. The application and approval processes for other business loan types can take weeks, while fast short-term business loans might get money into your hands in a matter of one to three days.
- Lower eligibility requirements. Online lenders typically offer short-term business loans open to borrowers with bad or fair credit.
- A possible credit boost. Many short-term loans are reported to business or personal credit bureaus. You can grow your credit score if you make on-time payments and keep your debt low.
- Short repayment timeline. Most short-term loans need to be paid back within two years. Some have even faster repayment periods of six, 12 or 18 months.
- Potential for higher rates. Some short-term small business loan options — particularly ones like merchant cash advances — come with higher interest rates than other financing options. Even if you only need a small loan amount, compare short-term business loan rates against other types of financing to avoid overpaying in interest.
- Frequent repayment. Don’t assume you’ll only need to pay once per month. Some short-term loans require weekly or biweekly payments.
The best short-term business loans can help your business seize growth opportunities or weather challenges. But these financing options have higher rates and shorter repayment periods than other loan types. Make sure this is the right type of loan for you before you apply.
Frequently asked questions
You should consider a short-term business loan if your company needs money now and can repay it quickly. Usually, you’ll be able to borrow somewhere between $50,000 and $100,000, and you’ll often need to repay it in a year or less, although some short-term loans offer a term of up to 24 months.
Yes. Getting a short-term business loan with bad credit is possible, but it will come with high rates and fees. If you have time, it pays to build your credit and improve your chances of approval so you can find an affordable option.
Yes, they’re legal. But be advised that they have less regulation because they’re considered an advance on future receivables, not a loan. That means that as a borrower, you should do your due diligence before working with any company that offers merchant cash advances.