What is a Short-Term Business Loan?
A short-term business loan is a quick, easy-access loan, perfect for business owners who need funds to cover sudden or unexpected expenses. Short-term business loans usually have 3 - 18-month payment terms and can be for amounts between $1,000 - $350,000. Short payment terms and small amounts mean lower credit requirements, amounting to easier access than other business loans. It also amounts, however, to higher interest rates and extra fees. Since short-term business loans are geared toward business owners who don’t have the credit to get longer-term funding, some lenders may try and exploit your circumstance by making your loan seem easier to afford than it actually is. If you’re careful in choosing your lender, however, a short-term business loan can be useful in a number of different situations, like surprise expenses, or for keeping things running in the slow season.
Short-term business loans are known to have of the highest interest rates out there. This is because lenders will need to make sure they make a profit even on a loan that's small and short-term. APR’s on short-term business loans can be as low as 10% and as high as 99%, depending on things like the amount, your credit rating, etc. While some of these rates are extremely high compared to other business loans, it’s not always the case that you’ll actually end up paying a ton of interest. This is because APR refers to a yearly percentage (annual percentage rate). But if you pay off your loan in only 3 months, then that percentage will appear a lot worse at first than your payments will turn out to be. To take the most extreme example, a 99% APR amounts to 8.25% per month (since 99 divided by 12 is 8.25). So for a 3-month loan, for example, all in all, you’d pay 24.75% of your loan amount in interest. On a $10,000 loan, this would mean $2,475 in interest over 3 months.
Short-term business loans are aimed at business owners who don’t have the credit to take out a larger, long-term loan. Some lenders require a personal credit score of 500 - 650, while others will require no credit check at all. This easy access makes them a good option for business owners in need of some urgent funds. At the same time, low credit requirements may mean unfriendly terms, like high interest rates or excessive fees.
For Bad Credit
If your credit is bad, a short-term business loan can be useful not only because of ease of access, but also because it could help improve your credit. Taking out a loan you know you can afford and paying it back on time will help build your credit and put you in a better position to get the longer-term funding you might need down the road. On the other hand, if your credit is bad, taking a out a loan you can’t afford would only make matters worse. That's why it's important to plan ahead and make sure you can have your loan paid off on time.
No Credit Check
Some short-term business loans are given out with no credit check at all. These are known as “no doc” loans. The appeal of a no doc loan can be pretty big since you know your credit won’t be a factor for the lender, and avoiding a credit check can save time in the approval process. No doc loans can be dangerous, however, since lenders will often ask for huge interest rates or find other ways to make an excessive profit from your bad credit situation. Again, being wise in choosing your lender is key.
Secured vs Unsecured
Short-term business loans are normally secured by some form of collateral, usually a business-related asset, like equipment or real estate. Some lenders approve unsecured loans, which likely have higher rates to account for the lack of collateral. Whether a secured or unsecured loan is the better option for you depends on your circumstances. Secured loans are a good match if you’re payment term is on the longer end of the spectrum and if you have the collateral to put up. Unsecured loans are less risky, in a sense, because you don’t stand the risk of losing your collateral, but they’re more expensive over all.
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Advantages and Disadvantages
Although short-term loans can be useful in some circumstances, they can easily lead you into a debt cycle. For this reason, they have been made illegal in some states. It can seem easy to borrow a small loan with no credit check, but it’s up to you to make sure you know what you’re agreeing to and that it’s something you can afford.
That being said, a short-term business loan can sometimes be just what you need to get out of a financial dilemma, like sudden damage to your facilities, or trouble meeting your expenses in a slow period. They could even be used to get in on a sudden investment opportunity or to build your credit up. As long as you’re careful who you borrow from and how you use your loan, a short-term business loan can be the perfect solution for a number of different situations.