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Many entrepreneurs have a love-hate relationship with business financing, so they often overlook short-term loans. Interest and other charges can put a bad taste in your mouth. You might feel like the loan has only made things harder financially.
On the other hand, loans are often a necessity. Small business lending and approval rates have been picking up recently, based on industry research. This means more people will have the capital to pursue their entrepreneurial dreams. That’s a good thing.
Unfortunately, despite a more favorable business lending environment, it still might be too difficult to get approval for a long-term loan or SBA loan. If that’s the case, don’t be disappointed. You can find other types of funding.
Read on to learn about three options for short-term loans, along with the benefits and requirements for each.
1. Short-term loans from an online lender
The digital age has made it possible to apply for and get a short-term loan from an online-based lender in as little as one day. Functioning much like a traditional term loan, payments are typically made daily or weekly with short-term loans, along with interest.
Requirements for approval generally are:
- At least one year in business.
- A decent credit score.
- At least $50,000 in annual revenue.
Typically, you could get anywhere from $2,500 to $250,000 through short-term loans, with the term ranging from three to 18 months. Interest rates tend to start at about 10 percent.
The speed in which the funds arrive is a major advantage, as short-term loans could help you out of a cash flow issue immediately. There’s limited paperwork (always a blessing). Also, the funds can be used any way you see fit, from meeting payroll to buying seasonal inventory.
2. Business line of credit
Cash flow problems remain one of the biggest challenges small business owners face. And roughly 84 percent say they can’t get all the funding they need.
What if there was a way to access cash anytime you needed? This would certainly solve some money problems, especially day-to-day needs.
This is precisely how a business line of credit can benefit you. It can ensure you always have cash to pay utilities, vendors and employees. The money can even be used for things like marketing campaigns to grow your business, paying off other debts, upgrading your office or storefront — and more.
The good news is that qualifying for a business line of credit can be much easier than traditional term loans. Qualifications usually include the following:
- At least six months in business.
- $50,000+ in annual revenue.
Your credit limit will likely be between $10,000 and $1 million, depending on your needs and your company’s financial situation. Interest rates typically go from 7 percent to 25 percent, which means it’s possible to get comparable rates to even long-term loans.
Another good thing about a business line of credit is that it gives you access to revolving capital, meaning that your credit limit goes back to its original amount once you repay.
For instance, if you use $20,000 of a $100,000 credit limit, your available credit will be $80,000. If you pay that $20,000 back next month, then your available credit will go back up to $100,000.
Also, you only pay interest on the funds you withdraw. This is nice because you can use funds as you need them. So, if your business line of credit has a limit of $50,000 and you take out $10,000, only that $10,000 is subject to interest charges.
3. Equipment financing
Most businesses require some form of equipment, whether it be computers and mobile phones to machinery and vehicles. If you have a restaurant, think about how necessary kitchen equipment is to your business’s success.
This is where equipment financing enters the picture.
Equipment financing is money lent to you so you can buy equipment outright. It can serve as a key form of financing to power your business forward. The good news is equipment loans are quite accessible.
You don’t need to put up collateral since the equipment itself secures the loan. Other typical requirements may include:
- At least 11 months in business.
- A decent credit score.
- About $100,000 in annual revenue.
The loan amount can be up to 100 percent of the equipment’s value, with interest rates generally spanning from 8 percent to 30 percent. The loan term is the expected life of the equipment (which can make it a “long-term” loan, depending upon the equipment).
Managing short-term loans responsibly — and getting ahead
Obviously, there are lots of advantages to getting short-term loans. In fact, it can be just what your business needs to get ahead.
To avoid the disadvantages — like the potential of falling into a debt trap or unreasonably high APRs — it’s important to understand how short-term loans can help you and how you should go about choosing, using and paying them back. Always crunch the numbers, compare options and go with the loan that makes most financial sense for your company’s current situation and future goals. Also, look over the payment schedule to make sure you can handle it.
Beyond the benefits the injection of cash into your business offers, short-term loans can also be a bridge to better loans, like the coveted SBA loan. If you pay back the loan on time, your credit score should improve and you’ll be able to graduate to better loan products. That means you could land a long-term loan that provides your business the capital to grow sustainably for years.