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What is a Short-Term Business Loan?

A short-term business loan is a loan designed for businesses that have a shorter term than more traditional loans, usually between 3-18 months. Short-term business loans, though usually of amounts above comparable personal loans, tend to be less than what you’d find with a traditional loan, usually under $250,000.

Short-term business loans are, like most other short-term loans, geared towards individuals with bad credit and limited options, and therefore tend to have unfavorable terms, like high interest rates and hefty fees. We recommend applicants exercise caution when shopping around for short-term business loans to make sure they’re getting the best possible deal.

Rates

Interest rates on short-term business loans are some of the highest around, due to their easy accessibility and low credit requirements. Short-term business loans are often presented as having low interest rates, but the rates offered are typically by month, obscuring the fact that the yearly rate is astronomical when compared with the APRs of more traditional loans.

If you can manage it, we recommend taking out a second mortgage, a new auto loan, or even a new credit card or line of credit before looking at short-term business loans, as each of these offers more favorable interest rates. Short-term business loans, though a viable option for business owners in need, should be seen as a last resort.

Credit Requirements

Short-term business loans have very meager credit requirements. The loans are designed for business owners with poor credit, so they are very accessible. This accessibility, however, comes at a price. Short-term business loans have some of the highest interest rates around and have other very unfriendly terms, such as hidden fees, that make the loans in many cases a bad deal for business owners.

If you truly only need the money for a month, and can pay it back, such as you could if you had outstanding payments from customers that would cover the amount of the loan, a short-term business loan could be a good option. If your business is in a more dire position, however, a high-interest loan won’t be helpful to you in the long run, and it could even make matters worse.

For Bad Credit

As mentioned above, short-term loans of all stripes, including those designed for business owners, are geared towards people with bad credit and are therefore easier to get than traditional loans, but you pay the price with the high interest rates. In most cases, a short-term loan is a bad option compared with other forms of lending, and should be viewed as a last resort for businesses in an emergency situation that feel confident they can repay the loan within the loan term, and therefore avoid roll-over.

No Credit Check

Short-term business loans awarded without credit checks referred to as ‘no doc’ loans, do exist, but they have been made illegal in many states because of the predatory nature of the lending. If you’re worried about how your credit will be viewed, it’s still worth facing the rejection than subjecting your business to outrageous interest rates and loan terms that could mean bad business later on. Other options worth considering include borrowing from friends or relatives, taking out a second mortgage, refinancing your car(s), taking out a line of credit/credit card, or meeting with a credit union to see about a short-term loan of more favorable terms.

Secured vs Unsecured

Short-term business loans are typically secured, in that collateral is backing the loan, although some are offered unsecured as well. As is the case with any loan, unsecured loans, being riskier to lenders, as a rule, have higher interest rates. Given that short-term loans already have significantly high interest rates, an unsecured short-term loan would be the worst possible scenario for interest rates on the market.

Advantages and Disadvantages

Despite all the talk around the web about the dangers of short-term lending, short-term business loans do have their place in the lender’s ecosystem, and, for certain financial scenarios, might be the best option. If your business is doing well and making payments on time with ease, but an emergency situation has cropped up (payments from clients stalled out, broken down equipment, fire), a short-term business loan could be just the ticket.

The problem with short-term loans is that they commonly trap businesses in cycles of debt. If a business can’t pay back the original loan, they’ll refinance with another loan, and another, with debt building each turn of the cycle. This scenario is so common that short-term lending has been made illegal throughout much of the United States. Aside from the big issue of debt spirals, short-term loans have extremely high interest rates, which makes them more of a last resort than a viable and normative financing option.