Short-term Business Loans: Definition, Costs & Providers

A short-term business loan supplies working capital for businesses to meet various needs, and may be secured or unsecured. Short-term loans typically have repayment terms up to two years. Interest rates start around 6% with the average APR on short-term business loans between 30% and 50%.

Short-term Small Business Loan Providers

Banks, online lenders, business loan brokers, and many other alternative lenders offer term loans for businesses. Banks generally offer the most attractive rates and terms, but also require the highest qualifications, while the types of short-term loans from alternative lenders are more expensive but more obtainable for business owners with less-than-perfect credit.

Short-term Small Business Loan Providers

OnDeck

OnDeck is an online lender that offers term loans and business lines of credit. Business owners can quickly submit an application online, with just their business tax ID and three months of bank statements. Approvals and funding are fast compared to traditional lenders, available as soon as the same day.

Some of the terms and costs of a short-term business loan from OnDeck are:

• Minimum credit: 600
• Time in business: At least one year
• Annual revenue: At least $100,000
• Loan amount: $5,000 – $500,000
• Term length: Three to 36 months
• Interest rates: Starting at 9%
• Fees: Origination fee up to 5% of the loan amount

OnDeck offers more lenient lending guidelines, so it’s easier to get a short-term loan from it which opens solutions up to more borrowers and businesses. On the other hand, fees are likely to be much higher than from a traditional lender. While OnDeck’s interest rates start at 9%, its average APR in 2018 was 48.7% according to its annual report.

BlueVine

Another alternative lender in the online space, and one of the best short-term loan providers, BlueVine offers invoice factoring, business lines of credit, and term loans. BlueVine’s term loan application is quick and can be completed in under 10 minutes. Loans can be funded in as little as a few hours by wire transfer, making this a competitive option for businesses in need of fast funding.

Some of the terms and costs of a short-term business loan from BlueVine are:

• Minimum credit: 600
• Time in business: At least six months
• Annual revenue: At least $100,000
• Loan amount: $5,000 to $250,000
• Term length: Six or 12 months
• Interest rates: 4.8% – 47.1%
• Fees: None

While BlueVine offers quick, flexible term loan funding, borrowers should be wary that while it lists interest rates as low as 4.8%, its APRs start at around 18.2% and can go as high as 78%. This is because BlueVine calculates its interest rate based on the term of the loan and not as an annual interest rate. Additionally, borrowers cannot get a discount on a BlueVine term loan by paying it off early, as the interest rates are represented as a total cost of the loan.

Bank of America

Bank of America (BofA) is a large bank offering a variety of different loan, credit, and deposit options to businesses across the U.S. BofA boasts comprehensive online banking solutions as well as banking hours on Saturdays in most of its 4,500 branches nationwide. BofA offers competitive interest rates, however minimum credit guidelines are stricter than some online lenders.

Some of the terms and costs of a short-term business loan from BofA are:

• Minimum credit: 670+
• Time in business: At least two years under current ownership
• Annual revenue: At least $100,000
• Loan amount: $10,000 – $100,000
• Term length: One to five years
• Interest rates: Approximately 6%
• Fees: $150 origination fee on successful applications

Businesses can apply for an unsecured short-term business loan from Bank of America online and receive approval as soon as the same day, with funding available within five business days. With low APRs and a one-time origination fee of $150, Bank of America’s short-term loan is an excellent choice for businesses that can meet stricter underwriting criteria. It is currently offered with a promotional rate of around 6%, making it one of the least expensive short-term loans currently offered.

Wells Fargo

Wells Fargo is widely recognized as one of the most popular banks for small business lending, and is one of the nation’s “Big Four” banking institutions with over 5,000 branches nationwide. Wells Fargo’s rates are competitive, but like BofA, its minimum lending criteria are stricter. Wells Fargo offers two different term loans, the BusinessLoan term loan and FastFlex small business loan.

Some of the terms and costs of short-term business loans from Wells Fargo are:

• Minimum credit: 650+
• Time in business: Not specified
• Annual revenue: Not specified
• Loan amount: FastFlex, $10,000 – $35,000; BusinessLoan, $10,000 – $100,000
• Term length: FastFlex, one year; BusinessLoan, one to five years
• Interest rates: FastFlex, 14.99%+; BusinessLoan, 7% – 21.99%
• Fees: $150 opening fee on successful applications

Wells Fargo is relatively unique among lenders as it does not require minimum revenue in order to get a short-term loan. Instead, it bases its underwriting and the amount of the loan on a business’s debt service coverage ratio (DSCR), typically looking for businesses between 1.25x – 1.5x. In other words, a business should have between $1.25 to $1.50 in revenue for every $1 borrowed.

How Short-term Business Loans Work

When a business secures a short-term loan, it agrees to pay back the loan principal (the amount borrowed) plus interest, by making a specific number of equal payments over the length of the loan. The loan payments may be due as frequently as daily, or as infrequently as monthly, depending on the specific terms of the loan.

A short-term business loan is typically a fully-amortized term loan, and may be secured by collateral such as a business’s assets, or unsecured. In some cases, commercial real estate loans may only be partially-amortized over the term, with a balloon payment due at the end of the term. This can be a useful form of gap financing, with the business intending to refinance the loan at or before the balloon payment becoming due.

In many cases, business lines of credit, merchant cash advance, and invoice financing may be considered types of short-term loans. These short-term business financing options are covered in more depth in the alternatives section below.

Short-term Business Loans vs Term Loans

Short-term loans and term loans are overlapping forms of financing, with a primary differentiator being the length of time the business has to repay the loan. A short-term loan is not necessarily a distinct financial product so definitions will vary depending on the source, but for general purposes a short-term loan can be defined as any loan with a term of one month to two years.

Who Short-term Business Loans are Right For

Businesses take out short-term loans for many different reasons. In most cases, businesses that have temporary working capital needs will seek a short-term loan to meet that temporary need. This includes seasonal or cyclical businesses as well as businesses that are increasing inventory and need additional capital in order to do so.

Some of the reasons businesses use short-term loans are:

• Payroll: Many businesses can go long periods of time fulfilling customer orders before getting paid. These businesses need to meet payroll and other expenses while waiting to be paid.
• Inventory: Businesses that need to order large amounts of inventory, before the holidays for example, use short-term loans to cover the expense and pay the loan back with holiday sales proceeds.
• Expansion capital: A business can borrow short-term funds to increase its product development, sales, and marketing in a bid to grow the company in a short period of time.
• Cyclical business cycle: Some businesses are highly tied to economic growth and downturns and may need short-term funding in order to meet payroll and production expenses during a brief downturn.

Whether a short-term business loan is the right form of financing will come down to several factors. Any business borrowing short-term capital will want to have a plan for paying back that capital. Short-term loans can be very expensive, especially from alternative lenders. If a business is compelled to continue taking short-term loans after the initial loan is paid off, financing costs will quickly cut into margins.

Short-term Business Loan Costs

The typical short-term business loan costs are:

Interest rate: 6% – 30%
Average APR: 10% – 50%
Origination fee: $150 up to 5% of the loan amount

Many short-term loans have attractive low interest rates while the corresponding APR may be much higher after including any fees. Also, how the interest rate is being expressed is important. Often the interest rate is simple interest for the loan term, meaning that what appears to be a low rate on a six-month term would effectively double, for example 6% simple interest over six months would equal 12% APR before factoring any additional fees.

Short-term Business Loan Terms

Short-term business loans may be secured, or unsecured. In general, small business term loans from traditional banks are unsecured, and require only a personal guarantee from the borrower (and often any partners with a greater than 20% stake). Conversely, alternative lenders may secure the loan. The most common method of securing a term loan is a UCC lien, which is a general lien on a business’s assets. The length of short-term loans is typically between six and 36 months.

Business owners should note that a lien on business assets may make it harder for a business to borrow from another lender in the future. Borrowers also should carefully read the loan terms to determine whether or not there is any discount for early payoff. Short-term loans are commonly written for a specific principal and interest amount, and the total interest due usually does not change if the loan is paid off early, although some lenders may offer early payoff discounts.

Short-term Business Loan Qualifications

Banks are typically more conservative lenders and will require a higher minimum credit score (between 650 – 680). Alternative lenders are generally more lenient, with some accepting credit as low as mid-500. Most lenders will want to see some time in business, with alternative lenders starting around six months to one year, and banks typically wanting to see at least two years. Annual revenue of at least $100,000 is required by most lenders.

The typical minimum qualifications for a short-term business loan are:

• Credit score: 550
• Time in business: Six months
• Annual revenue: $100,000

The lower a borrower’s credit is, the shorter terms and higher interest rates will be. For well qualified borrowers with established businesses, bank short-term loans will have the best rates and terms and most alternative lenders will not be able to compete; however, borrowers with bad credit, or businesses that don’t have at least two years in operations and strong cash flow will likely find that alternative lenders are the best bet.

Pros & Cons of Short-term Business Loans

Taking out a short-term loan to cover business expenses has both advantages and disadvantages. For some, it offers fast cash when it is most needed, and as a form of short-term debt it may be less expensive than carrying the debt over a longer period. On the other hand, interest rates are often higher and it carries the risk of creating a borrowing cycle that is difficult to escape from.

The Pros of Short-term Business Loans

Some of the benefits of short-term business loans are:

• Quick access to needed capital: Short-term loans are often funded with an application and minimal financial paperwork such as the last three months’ business bank statements. Potential same day funding makes these loans among the fastest to fund.
• Relaxed underwriting guidelines: Alternative online lenders may have more relaxed underwriting criteria such as lower minimum credit and lower annual revenue, compared to some long term loan options like an SBA loan.
• Short-term debt: With a short-term loan, interest is only paid for the loan term, so businesses that need quick cash to get through a six month cycle won’t be paying interest on the funds over a long period of time.

The Cons of Short-term Business Loans

Some of the disadvantages of short-term business loans are:

• Risk of borrowing cycle: Some businesses may need to continue borrowing after the short-term debt is paid off which can lead to a business continuing to use higher cost debt for long term needs.
• May impact ability to borrow: Short-term loans may have a negative impact on a business’s ability to borrow for other needs, especially if the lender has filed a blanket UCC lien.
• Frequent repayments: Some short-term loans may have repayments due as frequently as daily or weekly, which can negatively impact cash flow for businesses which collect large invoices weekly or monthly, rather than daily.

Bottom Line

A short-term business loan can be a low cost and fast way for many businesses to access short-term funds, with APRs ranging from around 6% to 50% or higher, depending on the business’s qualifications. Short-term small business loans are available from banks as well as alternative lenders. Businesses should be wary of added fees that may drive the overall cost of the loan higher.

Borrowers with a 600 credit score or better, six months in business, and annual revenues of $100,000 or more can apply for a short-term loan with BlueVine. Applying takes less than 10 minutes and loans can be funded as soon as the same day on short-term loans up to $100,000 starting at 4.8% simple interest.

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