Home » Pros and Cons of Short Term Business Loans
When you manage a small business, it’s important to understand the full range of potential loans and financing products available to you.
One of the biggest distinctions in traditional small business loan products is between long-term business loans and short-term business loans. These distinctly different kinds of loans vary significantly in the details of their duration, interest rate, repayment schedule, and so on.
Read on to learn more about short-term business loans in particular, with an eye towards the pros and cons of this kind of short-term business funding.
We’ll also answer some key questions about short-term business finance, and highlight the short-term business loans available from BizFly Funding.
What is a Short-Term Business Loan?
Put simply, a short-term business loan is a business loan designed to be used and repaid over a short period of time. This contrasts with long-term business loans, which typically have much longer durations and repayment periods.
Short-term business loans are a kind of short-term business finance product, which aims to provide businesses with quick access to the cash needed to operate their business or make a short-term investment.
In most cases, short-term business loans and long-term business loans may be either secured (requiring collateral) or unsecured.
The qualification requirements to obtain a short-term business loan will vary from lender to lender, and should always be reviewed in detail at your chosen short-term business lending company prior to applying.
Likewise, the short-term business loan interest rates will vary considerably from lender to lender, so be sure to get a quote for your short-term small business loan before you make a commitment.
What are the Benefits of a Short-Term Business Loan?
Aside from the fact that you should always strive to match your small business funding choices with your intended term of use and repayment to be fiscally prudent, there are also several other benefits to choosing short-term business loans.
Briefly, three of the top benefits of short-term business loans include:
- Quick funding.
Short-term business loans, especially from alternative, non-bank lenders, are quite quick to obtain.
They typically have less paperwork and a shorter waiting period (if any) compared to traditional bank loans. When you need money fast, a short-term business loan may be the ideal choice.
- Simple application process.
Most short-term business lending companies today offer online loan applications for their short-term small business loans.This makes it easy to quickly complete the loan application, get the necessary information to the lender, and get an approval decision.
- Easier to qualify for than bank loans.
Typically, short-term business loans and long-term business loans offered by alternative, non-bank lenders are far easier to qualify for than traditional business bank loans.
This means that more limited time in business, lower monthly revenue, and poorer credit scores often aren’t the impediment to obtaining a short-term small business loan that they would be when the short-term business funding source is a bank or traditional financial institution.
What are the Drawbacks of a Short-Term Business Loan?
At the same time, there are certainly some drawbacks to choosing a short-term business loan when compared to a longer-term business loan or a bank loan.
Three of the top drawbacks or cons for short-term business loans that are worth mentioning include:
- Higher interest rates.
Short-term business loan interest rates are generally higher than those offered on longer-term loans. This can be for two primary reasons.
- First, many short-term small business loans have terms that are less than 1 year.If the interest rate is expressed as an annual interest rate or annual percentage rate (AIR/APR), and the term is less than a year, then the effective interest rate you will pay is less than what is stated.
A 40% APR interest rate on a loan of $10,000, with a term of 6 months is effectively around 12% in terms of actual interest rate paid. Be sure to compare interest rate apples-to-apples when you are considering short-term business loans vs. long-term business loans.
- Second, short-term business loans are riskier for the lender than their longer-term varieties, since the business must begin repayment much sooner, and make repayments far more frequently.
This increases the rate of default on short-term business loans, and therefore requires short-term business lending companies to charge higher rates on these loans.
- First, many short-term small business loans have terms that are less than 1 year.If the interest rate is expressed as an annual interest rate or annual percentage rate (AIR/APR), and the term is less than a year, then the effective interest rate you will pay is less than what is stated.
- More frequent payments required.
Short-term business loans typically have either weekly or daily repayment requirements. This is in contrast to the much more common monthly repayment requirements on long-term loans.
If your business is strapped for cash, and does not generate consistent, regular revenue on a daily or weekly basis, then a short-term business loan may not be the ideal choice.
- Short-term loans increase your risk of going into significant debt.
Because of the greater frequency of repayments required for short-term business loans, they can effectively increase your risk of going into significant debt.
Longer-term loans give you a lot more flexibility, typically requiring only a single repayment each month.Spreading the loan out over a longer term means you pay more in interest, but make smaller loan repayments.
By contrast, the same loan amount spread over a short-term business loan requires much more dramatic repayments.It can make it much easier to fall into a debt trap, where you have to keep borrowing just to pay off existing debt.
Short Term Business Loans from BizFly Funding
To learn more about short-term business loans, or to start the application process, visit BizFly Funding online at https://bizflyfunding.com.
BizFly Funding is one of the premiere alternative non-bank lenders in the US today, focused exclusively on providing small business funding solutions.
Both short-term business loans and long-term business loans are available, as well as other forms of funding such as merchant cash advances, debt consolidation loans, lines of credit, and more.
Apply online, get speedy service, and even get your funds in as little as 1 business day when you choose BizFly Funding for your small business funding needs.
Frequently Asked Questions about Short Term Business Loans
Short-term business loans work in a similar manner to long-term business loans and other kinds of loan products.The key difference is the loan term or duration, which is typically much shorter.
This means that short-term small business loans often must be paid back far more quickly, with more frequent payments, than longer-term loans.
These loans typically are designed for a term of 6 months to 18 months or 2 years on the high end, compared to traditional, longer-term small business loans which may have terms as long as 5-10 years.
Accordingly, the ideal use for short-term business finance options, including short-term business loans, will be somewhat different than their longer-term counterparts.
Neither a short-term business loan nor a long-term business loan can necessarily be called better or worse than one another.
It’s all about what makes the most sense for your particular business financing needs, and the ideal uses of each kind of loan.
Short-term business funding can be very useful for urgent and short-term needs, where the investment or infusion of cash will yield revenue to repay the loan in the short-term.
Purchase order financing is a typical example of an ideal use for a short-term business loan.
Longer-term loans are more well-suited to projects with a long period before they yield revenue or profits, or for projects that are ongoing or open-ended. Leasing new equipment or a new building are examples of uses of a long-term loan.
There is no universal definition among short-term business lending companies as far as how long a short-term business loan is vs. a long-term loan.
No statutory or regulatory requirements dictate a particular loan duration or term.
However, in general, you will see short-term business loans with periods of a few months to no more than a year and a half or 2 years at the extreme high end.
The exact loan duration or term range offered will vary depending on your chosen short-term business funding provider.
As with most details about small business funding, short-term business loan interest rates vary considerably from lender to lender.
There are also individual business factors that may affect your particular rates, including time in business, credit score, revenue, size of the loan, etc.
In most cases, you’ll find short-term business loan interest rates to be somewhat higher than long-term loans, especially if they are compared in APR terms and the short-term business loan term is less than a year.
The interest rates also tend to be a bit higher given the higher-risk nature of a short-term business loan, since it must be repaid more rapidly, and thus puts a more immediate strain on the cash flow of a small business.
BizFly Funding offers short-term business loans with interest rates of between 9 and 45%.
According to various statistics, the average interest rate for all terms of small business loans is between 7 and 100% in the US.
Short-term business loan rates are generally between 2 and 3 times the APR of a longer-term loan.
BizFly Funding offers short-term business loans with interest rates between 9 and 45%, meaning most businesses can obtain short-term business funding for well less than the national average range.
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