If you’re looking for a short term business loan, chances are you need the funds fast. So we’ve not wasted any time and have answered some questions you might have before you start comparing short term business loans.
Why would I consider a short term business loan?
While everyone will have a different reason for applying a for a short term business loan, some of the most common reasons include:
- An unexpected cost upsurge
- Covering unexpected operation costs
- Seasonal cash-flow holes
- Emergency repair
- Awaiting a client to pay an invoice
How much am I able to borrow with a short term business loan?
Some lenders will allow you to borrow up to $250,000, however, this will depend on your borrowing capacity. This is where you lender will determine whether you satisfy the lending criteria, which will be based on things like your current cash flow and credit listings.
Is there a difference between short term loans and regular business loans?
Unlike a regular business loan that will ask for monthly repayments, if you apply for a short term business loan, you may be asked to make daily repayments. A short term business loan also has shorter terms, like 3-12 months, while a regular business loan has terms of up to 5 years.
What are the pros and cons of using a short term business loan?
It’s important that you weigh up the pros and cons of short-term business loans before making a decision. One of the pros about using a short term business loan is the quick approval and access to funding, so you may have the funds in your account within one business day. And since you’ll be approved quickly, you’ll also be able to take advantage of any business opportunity, or to fill a gap in your accounts receivable or put it towards urgent costs.
On the other hand, short term business loans generally come with higher interest rates and fees. This is usually to cover the cost of loss of long-term interest, since you will be making your repayments on a daily or weekly basis - which is another to keep in mind before you apply.
What types of short term business loans are available?
Like a personal loans, short term business loans are available as secured or unsecured. However, there is also the option to take out a commercial loan. All three loans have pros and cons, which you will need to weigh up before you decide on the one that’s right for you.
Secured short term business loans - A secured loan will ask for an asset to be used as security, like your home or car and in return you will receive a lower interest rate. Just keep in mind that if you default on the loan, your lender has the right to repossess your asset.
Unsecured business loans - Unsecured business loans won’t ask for any security, but they do generally come with higher interest rates.
Commercial loans - A commercial loan is your third finance option, which usually comes in the form of an overdraft or a line of credit. A line of credit is an established agreement between you and your lender that gives you access to a predetermined amount of credit whenever you needs. These types of loans often come with high monthly fees and rates.
What kind of interest rates can I get for a short term business loan?
The type of short term business loan rates available are fixed or variable. And even though you may be in a rush to get some much-needed cash, you’ll need to compare the benefits and drawbacks of both before making your decision.
Fixed interest rates - A fixed rate means your repayment amount will never change because you’ll be locking in your rate for the whole loan term. However, these kind of rates do tend to be on the steep side.
Variable interest rates - A variable rate does the opposite and will change according to the market. These types of loans also come with other repayment features, like an extra repayments and redraw facility. Just remember, if rates rise, so will your repayments.
Is there anything else I should compare in a short term business loan?
Yes, once you start shopping around on short term business loans, you’ll find that many loans come with additional features, like flexible repayment options. It’s worth comparing these as it could help you save on interest in the long run.
Depending on the type of loan you choose, you may have an extra repayments option - this allows you to make extra repayments to your loan. Not only will this help you save on interest, you’ll be paying your loan off faster. However, some lenders may charge a fee to do this and can set a limit on how much extra you can repay.
Another feature your loan may come with is the redraw facility. With a redraw facility, you’ll be able to withdraw any of your extra repayments, which you can put towards an unexpected bill or other unforeseeable cost.
Just like any other loan, you will have to pay a few fees. Some of the most common fees you might be charged include:
Establishment fees - Also known as an application or upfront fee, establishment fees are one-off payment you are charged at the start of your loan. It covers the cost of setting up your loan file with the lender.
Service fees - These are also known as ongoing fees and are charged on either a monthly or annual basis. This is a charge you pay to keep your loan going.
Is there anything else I should be aware of before I start my application?
Whether your business is large or small, you’ll still need to consider a few factors that your lender will take into consideration before you submit your application, like:
Business eligibility - Some lenders will have different eligibility requirements, like having been in business for a minimum of 12 months.
Turnaround time - Depending on your financial situation, you may need access the funds quickly, so you’ll need to make sure your lender will be able to do this within your requested time frame.
Is there anything that would cause my application to be rejected?
Before you submit your application, it’s important you’re aware of the common mistakes that could have your application rejected. This could include:
Frequent changes to your business structure - Lenders will ask to see your current business structure, so if your business has undergone multiple reconstructions you could have your application rejected.
No loan purpose - Once you submit your application, you will be asked the specify the purpose of the loan. If you don’t have a plan of what you intend to use the loan for, your lender may see this as a red flag.
Borrowing too much - As your lender determines your borrowing capacity, they will look into your business account details, so if you’re asking for more than you can afford, your lender will reject your application.
What do I need to apply for a short term business loan?
Once you’ve found loan that’s right for you, there are a few documents you’ll need to have handy before you apply, such as:
Your bank record - Your bank record might be the most important factor in your application, so you’ll need to avoid overdraws and bouncing cheques.
Your personal credit history - This will also be taken into account so it’s a good idea to take care of any lingering debt. Your lender will also take your own personal stake into consideration (having your own money in the business)
Your cash flow - You’ll need to supply your current cash flow and future cash flow projections to your lender, as this will help determine whether you are able to afford the loan.