How to manage a short-term business loan
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According to the 2023 Report on Employer Firms from the 2022 Small Business Credit Survey, 94 percent of businesses surveyed experienced a financial challenge in the previous 12 months. These financial challenges range from uneven cash flow to operating expenses and rising costs of goods and services, all common reasons to get a short-term business loan.
Since short-term loans have shorter repayment terms — often three to 18 months — managing them wisely is essential. Otherwise, you could end up defaulting on your loan or in a cycle of debt, creating more financial hardship.
Types of short-term business loans
Typically, the best short-term business loans offer a quick turnaround to meet your business’s needs with repayment terms of 12 months or less. That said, exploring your options ensures you get the right short-term loan for your business. Here are some of the most popular types of short-term business loans.
|Type of loan||Overview||Best for|
|Term loan||A loan that pays out in a single lump sum. You repay the loan over a predetermined number of months and pay interest on the full amount.||One-time projects and purchases.|
|Line of credit||A revolving line of credit. You can borrow money up to your credit limit and pay it back monthly. You pay interest only on your current debt.||Cash flow, covering emergency expenses and dealing with seasonal sales slumps.|
|Merchant cash advance||An arrangement with a company that agrees to loan you money using your credit card sales as collateral. You repay the loan using future sales.||Emergency or seasonal expenses and purchasing inventory.|
|Invoice factoring||Allows you to get up to 90 percent of an unpaid invoice from an invoice factoring company. Once the invoice is paid, you get the remaining amount minus any fees.||Working cash flow to cover expenses without waiting for outstanding invoices to be paid.|
5 tips for managing a short-term business loan
Regardless of the short-term business loan you choose, these five tips can help you manage your loan effectively, avoiding any financial issues in the future.
1. Know your loan terms
Loan terms determine everything from your monthly payment amount to maintenance fees and prepayment guidelines. They also outline the maturity date of your loan and what happens if you fail to pay on time.
Are you paying interest, or does your loan have a factor rate? Can you make additional principal payments? Choosing the best short-term business loan for your organization can help you build your business credit score and grow your business, but failing to understand your loan terms could do the opposite.
2. Budget to ensure you can afford loan payments
It’s tempting to take out as much as a lender will give you, but the reality is that borrowing a smaller amount is often wiser. Especially when you consider all of the loan fees you’re responsible for. Short-term loans are best for businesses that have immediate financial needs.
The average loan is subject to several fees, like application, origination, underwriting, late and administration fees. Use a business loan calculator to see your monthly payments to ensure you can afford your loan payments. Once you know exactly what your loan payments will be, budget to make sure you always have the funds for your payments.
3. Stick to your repayment plan
On-time payments account for 35 percent of your personal FICO score and can affect your business credit score. As short-term loans have shorter repayment periods than other types of business loans, it’s easy to get into a cycle of debt if you are late or behind on payments. Additionally, failing to make payments could result in defaulting on your loan, impacting your business’s financial future.
Prioritizing on-time payments is the most important thing you can do to manage a short-term loan balance responsibly.
4. Avoid taking on other debts
Short-term loans can be an effective way to fund your business during seasonal slumps or in an emergency. But if you take on other debts while repaying a short-term loan, it can become difficult to keep up with payments.
If your business needs additional funding during your repayment period, consider alternatives to short-term business loans or other types of financing before taking on new debt.
5. Stay in touch with your lender
Communication is key when working with lenders. Always reach out if you have questions or concerns regarding your loan. For example, contact them if you don’t understand an extra fee or can’t make a payment as your business is experiencing financial hardship.
The sooner you communicate your concerns, the more likely your lender will be willing to work with you to find a solution.
The bottom line
Short-term business loans are a good option for fast funding if you manage them correctly. By budgeting, understanding your loan’s terms, keeping an open line of communication with your lender and paying on time, you can manage your short-term loan successfully, making it a useful tool for financing your business quickly.