Key takeaways

  • Short-term business loans can help small business owners and entrepreneurs when they need emergency funds, have an unexpected business opportunity, need to buy inventory or experience a cash flow shortage
  • Consider the interest rate and other fees when determining how much you can afford for a short-term loan
  • Factor rates — a flat fee that come with some short-term loans — are expressed as a decimal instead of a percentage and can be more expensive than interest rates

A short-term business loan can help small business owners and entrepreneurs when they need emergency funds, have an unexpected business opportunity, need to buy inventory or experience a cash flow shortage.

There are multiple types of short-term loans and lenders offering them. Knowing how much you can afford, how to compare lenders and what kinds of requirements you’ll have to meet can help you get the best short-term business loan to meet your needs.

How much can you afford?

Determining how much you can afford should include not just the loan’s principal amount, but also the interest rate and other fees you might have to pay. Compared to traditional business loans, short-term small business loan interest rates and fees are usually higher, increasing the overall cost of the loan.

If you have no prior business credit history or bad credit, you still have several options available for emergency business loans, but be prepared to pay higher interest rates and fees than a business with good credit.

A business loan calculator can help you determine your payments in different scenarios and compare loan offers to choose which emergency business loan best fits your budget.

What type of short-term loan?

With several types of short-term loans available, which one is right for you? The right type depends on factors like your loan needs, repayment terms, budget, credit score and debt-to-asset ratio.

Weighing the pros and cons of different short-term business loan types can make finding a short-term loan easier because you can target the type that best fits your needs and business profile.

 

Loan type Pros Cons
Short-term loan
  • Repayment period of up to 24 months
  • Lower interest rates
  • Immediately begin paying interest on entire loan amount
  • May require daily or weekly repayments
Lines of credit
  • Resets as payments are made
  • Only pay interest on the amount you draw
  • Funding may only be available during the draw period
  • May require daily or weekly repayments
Invoice financing/factoring
  • No impact on credit score
  • Fast funding
  • Uses customers’ creditworthiness to determine eligibility and fees
  • High fees
  • Only available to businesses who invoice other businesses
Merchant cash advance
  • Fast funding for emergencies
  • Provides lump sums to improve cash flow
  • Uses credit card sales instead of credit score or annual revenue
  • High costs
  • Short repayment terms
  • Only works for businesses with credit card sales

 

Factor rates

Factor rates are what some short-term loan lenders use to determine how much money you owe on borrowed funds. Factor rates are fixed and only apply to the original borrowed loan amount.

Unlike factor rates, interest rates for a short-term emergency business loan can be variable or fixed and apply to the existing balance. But you could pay less interest if you repay the loan early, which isn’t an option with a factor rate short-term business loan.

Factor rates are typical for invoice factoring and merchant cash advances and may be used for business lines of credit. Business owners with bad credit are more likely to have short-term loans with factor rates than interest rates.

Since factor rates are expressed as a decimal instead of a percentage, it’s hard to see how expensive they can be. Converting the factor rate to an interest rate can help you compare loan options and better understand your total annual percentage rate (APR). The APR is your yearly loan cost, including the principal, interest and additional fees.

What’s your credit score?

Short-term lenders have different credit score requirements. The greater the risk a lender takes in securing a loan for your business, the stricter loan requirements typically are. Not only do alternative lenders, like peer-to-peer lenders and crowdfunding opportunities, offer a wide range of short-term business loans, they usually have looser credit requirements than other lenders.

Most alternative lenders have a minimum credit score requirement of 500 to 625, but you can still get approved if you have a lower credit score. This option may be the right fit if you need an emergency business loan with the fastest funding and simplified application process. Just be prepared to pay a higher interest rate and APR.

FICO Score

A FICO score is a personal credit score used by each of the three credit bureaus — Experian, Equifax and TransUnion — to determine your creditworthiness. Five credit activities determine your credit score with weights that vary by each credit bureau:

  • How much debt you owe
  • Credit history length
  • Payment history
  • Mix of different credit types
  • New credit inquiries

Although you will probably have a different credit score with each bureau, they should be within about 20 points of each other. Your FICO score can range from 400 to 850, with the higher scores commanding better interest rates and repayment terms.

Business credit score

A business credit score weighs similar credit activity but includes business-specific criteria, such as risk factors for your industry, company size and vendor relationships. While credit bureaus use private information to determine your personal credit score, they use public information to calculate your business credit score.

Business credit scores are on a 1 to 100 scale, measured by Experian, Equifax and Dun & Bradstreet. Small businesses may have a unique FICO SBSS (Small Business Scoring Service) score, ranging from 0 to 300. FICO SBSS scores are most commonly used when applying for an SBA loan.

Which lender?

Once you determine which type of loan is best, you should compare lenders, which can help you find the best short-term business loan for your funding needs. When comparing lenders, research:

  • Loan requirements to know if you meet them.
  • Costs, including factor rate costs, if applicable, and total APR.
  • Term lengths can range from daily or weekly repayments for merchant cash advances to 24 months or more, especially if you get a secured business loan.
  • If there are any penalty fees if you repay early or miss a payment.
  • What could happen if you default on the loan.

Are you eligible?

Eligibility for a short-term business loan can vary by lender, loan type, amount of funds and credit score. For example, invoice factoring uses your clients’ credit to determine eligibility, while invoice financing uses the business credit score. Your business loan may be denied if you don’t pay attention to a lender’s eligibility requirements.

When you apply for any short-term loan, including an emergency business loan, you might need to provide the following:

  • A business plan
  • Industry type
  • The business’s annual revenue
  • How long you’ve been in business
  • Your business credit score
  • Your personal financial history and credit score

You may have the choice between a secured and unsecured business loan. Although secured loans offer better repayment terms and interest rates, they have stricter eligibility requirements.

Secured business loans require collateral, a business asset the lender can seize if you default on your loan, like real estate or business equipment.

If you have a bad credit score, qualifying for an unsecured business loan may be easier. You can typically get an unsecured short-term loan without collateral, but lenders usually require a personal guarantee, which allows lenders to take personal assets if you default.

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Bankrate insight

Business credit cards can also cover short-term expenses. If you can pay your balance in full each month, you can avoid paying interest charges. That makes them a more affordable alternative to short-term business loans.

Bottom line

When you need fast funding for your business, a short-term loan may be the right solution. Determining your budget for repayment and calculating your APR on an annual and monthly basis will ensure you can repay the loan and avoid defaulting, which can be detrimental to your business and personal credit scores. Understanding the different short-term loans and lenders and how repayment terms and eligibility requirements differ can help you choose the best short-term business loan.

Frequently asked questions

  • Seasonal loans are usually short-term, meaning they must be repaid within a year or less, though some lenders may offer extended repayments of up to 24 months. Short-term loans for seasonal businesses can help keep the company going during slow months and provide capital for inventory to prepare for the busy season. A business line of credit or term loan may be best for a seasonal business, as they offer more predictable and affordable repayment terms than invoice factoring or financing.
  • Banks offer emergency business loans but usually have stricter eligibility requirements to qualify. For instance, banks and credit unions may only provide short-term business loans to established businesses with a minimum credit score of 670, but offer longer repayment terms and better interest rates.
  • Yes, you can get a short-term business loan with bad credit, but it will usually cost more, with higher interest rates and more fees. Alternative lenders, including crowd funders and peer-to-peer lenders, offer bad credit short-term business loans and can have more favorable terms. You may qualify for merchant cash advances or invoice factoring, but these are usually the most expensive lending options.