Editor's choice: SmartBiz business loans
- Large network of SBA lenders
- Low potential APR
- Loans from $30,000-$5 million
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There’s no one way that short-term business loans work. That’s because a short-term loan can be any type of business financing: Fixed-term loans, invoice factoring or financing and payroll funding all involve different ways of borrowing and paying back funds.
What short-term loans have in common is that they typically come in smaller amounts, have shorter loan terms and more require frequent payments than your standard business loan. With most short-term business loans, you can expect to make daily or weekly repayments and pay it off in a matter of months or up to two years. Interest rates and fees are also typically higher than long-term business loans but they have lower personal credit requirements.
Often referred to as business payday loans, these are generally meant for emergencies to fix quick cashflow problems. That’s because high interest rates and fees make them unaffordable to cover large expenses — and you likely won’t be able to qualify for a large amount of funds anyway.
There’s no one-size-fits-all short-term business loan. The loan type that works best for you depends on your business’s immediate needs and how it operates. Have a lot of outstanding invoices? Invoice factoring might be what you’re looking for. Just need to cover a small one-time expense? A business term loan might be best.
Here are five common types of short-term business loans to consider and how they compare:
|Loan type||Who’s it for?||How much can you borrow||Turnaround time||Typical cost||Eligibility requirements|
|Business term loan||Any business with a one-time expense||$2,000 to $250,000||As fast as one day||Starting at 10% APR|
|Invoice factoring||Businesses that rely on accounts receivable and don’t care about keeping relationship with customers||80% to 95% of the value of your invoices||As fast as one day||Factor fee between 0.2% and 5% each week your client takes to pay their invoice|
|Invoice financing||Businesses that rely on accounts receivable and want to keep their relationship with customers||70% to 95% of the value of your invoices||As fast as one day||Processing fee around 3% plus a factor fee from 1% to 5% each week your client takes to pay their invoice|
|Line of credit||Seasonal businesses||$2,000 to $100,000||As fast as one day||12% to 36% APR|
|Merchant cash advance||Businesses that rely on credit or debit card sales||$2,000 to $250,000||As fast as one week||Factor rates from 1.14 to 1.18|
Business term loans come in one lump sum that you pay back over a set period of time with interest and fees. Loans with a term less than 18 months or two years are considered short-term and often come with daily or weekly repayments, instead of monthly repayments.
Invoice factoring involves selling your business’s unpaid invoices to a third party for a percentage of their value. Your lender gives your business a smaller percentage of the invoices upfront after deducting a fee. Once your customers pay off the invoices, the lender gives your business the remaining amount.
You can either sign up for invoice factoring monthly to make sure all of your business expenses are covered or use invoice factoring to cover a one-time payment. You can also either factor all of your business’s invoices or select which invoices to factor.
Similar to invoice factoring, invoice financing gives you an advance on your invoices. It’s essentially a loan backed by your company’s invoices. You’ll get a percentage of your invoice’s value upfront, which you pay back with interest and fees. Once the client pays you, you repay your lender.
Lines of credit give your business access to a certain amount of funds at the last minute, similar to a credit card. You only have to repay what you borrow and your loan term typically starts when you make your first withdrawal. Short-term lines of credit typically come with terms that range from six to 12 months with weekly or even monthly repayments.
Merchant cash advances are quick lump-sum advances on your business’s future sales. Your business can typically qualify for a certain percentage of its annual sales and pay it back with a percentage of your business’s daily sales or with fixed daily withdrawals from your business’s bank account.
Instead of getting an interest rate, you’ll get a factor rate, which determines how much you’re on the hook to pay back up front. Multiply your merchant cash advance by the factor rate and that’s how much you’ll pay.
|Loan||Turnaround time||Average repayment period|
|Short-term loans||As fast as one business day||Less than 1 year|
|SBA Loans||As fast as three weeks||5–25 years|
|Lines of credit||As fast as one business day||6 months to 5 years|
|Long-term loans||As fast as two business days||1–5 years|
|Merchant cash advance||About one week||Varies by sales amount|
|Personal loans for business||As fast as one business day||3–5 years|
Short-term business loans could help your business in a pinch. Their fast turnaround time and relatively effortless applications mean you can get a small amount of funds fast when you need it. But your business will pay for that quick and easy application — they cost more than your typical business loan. You might want to treat them as a last resort.
Curious about how other types of business financing work? Check out our business loans guide, where we break things down and compare lenders.
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