What are the most common reasons for a short-term loan?
This is good for businesses because it makes it possible for a business without assets that would be considered collateral to access borrowed capital. If you apply for a short-term business loan, you should expect this as well as the need to sign a personal guarantee.
There are a number of reasons why a small business would choose a short-term business loan. As a genera rule, think in terms of the need. A short-term loan is often the best way to address a short-term financial need. Here are a few use cases where a short-term loan could be a good fit:
- Project start-up costs: Ramping up a new project often requires some upfront cost that might be more than what you have available in cash flow, but can be recouped in 60 or 90 days. In that case, the ability to get in and out of a short-term loan quickly at a lower total dollar cost could make more sense than a longer-term loan of several years or more.
- Bridging a seasonal cash flow gap: Seasonal businesses sometimes need to borrow to meet cash flow demands in-between their busy seasons. A short-term loan could provide the cash flow needed to bridge the seasons (provided there is enough cash flow to make the periodic payments).
- Purchasing quick-turnaround inventory at a discount: It’s not uncommon for suppliers to occasionally offer steep discounts on merchandise you regularly sell-provided you can purchase a larger-than-normal quantity and respond quickly. A short-term loan could be a good fit for such times since these lenders can typically respond to your loan request quickly and make capital available within a day or two.
- Cover the costs of emergency repairs of critical business equipment: When equipment necessary to the operation of your business fails, you can’t afford not to access cash as quickly as you can to make repairs or replace the equipment. A short-term loan can make that capital available quickly.
Types of short-term business loans
Whether you’re a brand-new startup or an established business, there are a few different short-term business loans from which you can choose. Each comes with its own features and terms , as well as benefits and drawbacks. Here’s what to know about each.
These loans are similar to traditional bank loans, but with a shorter repayment term. In general, you’ll have a hard time finding term loans with short repayment periods from traditional small business lenders. Instead, you’ll likely need to work with an online lender to get what you need.
Depending on the lender and online payday CA your credit situation, interest rates on these loans can range from 8% all the way up to 99%. If you only qualify for loans on the high end of that spectrum, it may be worth comparing it with some of the other short-term business loans available or checking to see if there’s another way to solve your cash-flow problems.
Lines of credit
Most business lines of credit offer long repayment terms. But some online lenders offer short-term credit lines if you prefer that setup over a term loan.
Business line of credit interest rates can range from 8% to 80%, with short-term loans likely on the higher end of that spectrum.
Also called supplier credit , this type of short-term loan is an excellent way to get a handle on your cash flow. It involves working with one or more of your vendors to create a credit arrangement, where you get some time – typically 30, 45 or 60 days – to pay for a product or service they provide instead of cash on delivery.