There are several types of short-term business loans designed to give businesses quick access to needed capital. The most common types include short-term loans, business lines of credit, accounts receivable financing, and merchant cash advance. Costs vary based on the type of short-term loan, with interest from 6%–120% APR.
How Short-term Business Loans Work
Short-term business loans are available to businesses that need access to cash for short-term needs. Those needs may be financing specific assets, like equipment, or borrowing against accounts receivable or other anticipated future revenue of the business. Businesses agree to repay the borrowed funds over a certain term (usually 12 months or less), plus interest and other finance charges.
Short-term loans may be secured or unsecured. In the case of a secured short-term loan, it may be secured by a business’ credit card receipts, accounts receivable, inventory, equipment, or by a blanket UCC lien on a business’ assets. Unsecured loans typically require only a personal guarantee by the business’ owners. Borrowers then agree to either a fixed payment amount over a period of time, or a percentage withheld from future receipts or accounts receivable.
The 4 Common Types of Short-term Loans
Type of Loan
Well-qualified businesses that need short-term funding
Manufacturing or other fulfillment-based businesses with large gaps between invoice collections
Seasonal businesses that need continued access to on-demand funding
Last resort financing for access to critical capital
The four common types of short-term loans are:
1. Short-term Loan
Short-term loans may be used for virtually any business purpose, such as purchasing inventory, expansion, and payroll. Term loans are one of the least expensive forms of short-term business financing. Providers of short-term loans range from traditional banks to online business loan providers. Interest rates start around 6% at the bank, with APRs climbing to 30% or higher for borrowers with poor personal credit or businesses with no operational history.
Who Short-term Loans Are Right For
Businesses that need unsecured access to funds for a range of different uses may find that a short-term loan is the best option. Short-term loans are highly flexible, and fund relatively quickly. Interest rates are among the most competitive for short-term borrowing. Borrowers who know they need a specific amount of cash to address a specific, one-time need will be best served by a short-term loan.
Short-term Loan Costs
The costs associated with a short-term business loan will vary significantly by provider, with traditional banks typically offering the most competitive interest rates. Many online lenders offer short-term loans, typically targeting businesses owners who aren’t able to qualify with a bank. This can result in high interest rates, as well as significant origination fees, which can result in higher APRs than expected.
Some typical short-term loan costs are:
- Interest rate: 6% to 30%
- Estimated APR: 6% to 50%
- Origination fee: $150 up to 5% of the loan amount
- Ongoing fees: Typically none
The biggest factor borrowers will want to watch out for is whether there is an origination fee associated with a short-term loan. Some lenders may offer an attractive interest rate; however, when coupled with a 5% loan origination fee, the actual cost of borrowing will be significantly higher, especially if the fee is rolled into the loan. Most lenders charge an origination fee of some sort, with many banks charging between $150 and $500.
The second largest factor for borrowers to watch out for is how the interest rate is expressed. If a lender offers a six-month loan with 10% simple interest, in reality that loan has an APR of 20%. Many lenders will allow businesses to borrow more money after a loan has been paid off at least 50%, making many short-term loans act more like a line of credit, but also impacting the overall cost of borrowing.
Short-term Loan Terms
Term lengths on short-term loans typically start around three months, although borrowers should be aware that not all lenders specifically offer short-term loans, and may have repayment terms up to five years. Many of the best business loans require repayment as frequently as daily, and weekly is common. Monthly repayment terms are more likely to be agreed to by traditional banks. Short-term loans may be secured or unsecured.
General terms for short-term loans are:
- Speed of funding: One to three days
- Funding amount: $2,500 to $500,000
- Term length: Three to 36 months
- Repayment frequency: Daily, weekly, or monthly
Short-term loan terms are fairly straightforward and have the potential to fund quickly, with some funding in as little as 24 hours. Term length plays an important role in the suitability of a short-term loan by influencing a business’ cash flow due to repayments and the total cost of borrowing. Many online lenders offer daily or weekly repayment, and some offer monthly. In general, traditional banks require repayment on a monthly basis.
Short-term Loan Qualifications
While many alternative lenders will accept bad borrower credit and six months in business, traditional banks are much more likely to require at least a 650 credit score, one or more years in business, and higher minimum annual revenue. Borrowers who can qualify for a short-term loan with a bank will likely find more competitive interest rates and associated terms.
Average minimum qualifications for short-term loans are:
- Credit score: 550 or higher
- Time in business: At least six months
- Annual revenue: $100,000 or more
Minimum credit and time in business guidelines are the highest for short-term loans, but even businesses that are able to meet the minimum requirements may find it difficult to obtain a meaningful amount of cash. Business owners concerned about marginal qualifications may want to utilize a business loan broker, which can help them to obtain funding by shopping their loan out to multiple lenders all at once.
What Short-term Loans Are Missing
Short-term loans are often the best, easiest loans for one-time needs, where the funds can be paid off quickly. They are straightforward to qualify for and fund very quickly. On the other hand, not all businesses will be able to meet the requirements in order to obtain financing, and in many cases, the interest rate and payments may be much higher than a comparable secured equipment loan, or a long-term loan such as SBA 7(a).
Additionally, in many cases, paying off a short-term loan early will not reduce the overall cost of borrowing. This is because many lenders require that the entire loan, as well as applicable interest for the term, is paid off, whether the loan is paid off in one month or 12. This is in contrast to borrower expectations that an early payoff will net businesses significant savings in interest. Borrowers should check with the lender for exact terms and payoff amounts.
2. Accounts Receivable Financing
Accounts receivable (AR) financing, or invoice financing, is a form of borrowing against unpaid invoices that is similar to factoring. Unlike invoice factoring, where the account is transferred to the lender, with AR financing the business retains control of collecting on the account, and is advanced a percentage of each invoice due, usually around 80% to 95%.
Who Accounts Receivable Financing Is Right For
For businesses with well-qualified customers, accounts receivable financing is a common method of creating manageable cash flow for the business, without turning over customer collections to a third party. For example, an invoice for a three-month production run and net 60 payment terms may create significant challenges meeting payroll and other operational costs. For companies that face these challenges regularly, AR financing may be a sustainable alternative to other borrowing strategies for financing expenses like inventory.
Accounts Receivable Financing Costs
AR financing can be a relatively inexpensive method of obtaining short-term cash compared to methods like merchant cash advances (MCAs). It is commonly used by businesses to finance the fulfillment of orders, payroll, and other operating expenses incurred while waiting to be paid. Instead of an interest rate, finance companies charge a discount rate, which is applied to every week the invoice remains unpaid. Typically, the only other fee a business should expect to pay is a wire transfer fee if money is needed immediately.
Some typical AR financing costs are:
- Discount rate: 0.25% to 0.7% weekly
- Estimated APR: 10% to 80%
- Origination fee: None
- Ongoing fees: Wire transfer fee may apply
While invoice financing costs can be competitive to other forms of financing, the cost goes up the longer an invoice takes to pay. For businesses that cyclically take out invoice financing, borrowing costs can exceed comparable short-term or long-term loans.
Accounts Receivable Financing Terms
The amount business owners can borrow through invoice financing is tied to the size of invoices owed by customers, with most lenders starting around 80% of the invoice total, up to 95%. Invoices are typically paid back in full when collected, within 12 to 24 weeks of borrowing.
General terms for AR financing are:
- Speed of funding: One to three days
- Funding amount: $1,000 to $5 million
- Term length: 12 to 24 weeks
- Repayment frequency: When an invoice is paid or repaid by the borrower according to terms
AR financing is another speedy way for businesses to access the cash they need. Where they can get tricky is when an invoice is not paid on time, which typically means the borrower will need to start making payments, and it may prevent the business from borrowing additional funds until the invoice is paid off.
Accounts Receivable Financing Qualifications
The minimum qualifications for invoice financing are some of the lowest available to small business owners. This is because the majority of the underwriting is tied to the creditworthiness of the business’ customers. What this means is businesses with as little as three months in operation and monthly revenue of at least $4,000 can borrow.
Average minimum qualifications for AR financing are:
- Credit score: 500 or higher
- Time in business: Three months or longer
- Annual revenue: $50,000 or more
Not all invoice financing companies have a minimum cutoff for invoice financing, but those that do want to see a score of at least 500 in most cases. Additionally, some invoice financing companies will only work with larger invoices, so businesses will need to evaluate each company based on its specific minimums. Invoice financing companies may refuse to finance an invoice if the customer’s credit shows it has a poor track record of paying invoices and other debts.
What Accounts Receivable Financing Is Missing
AR financing can be a useful tool for businesses that need access to future revenue that is tied up in receivables, especially for businesses that may have difficulty qualifying for a short-term loan or line of credit. However, AR financing is not a good fit for businesses that collect daily receipts as opposed to large invoices over weeks or months, leaving some businesses to consider other forms of financing, such as a merchant cash advance.
3. Business Line of Credit
A business line of credit allows a business to draw the amount of capital needed for a period of time to meet certain obligations, repay the line, and continue to make additional draws as needed. Because it is not a single lump sum, like a term loan, it allows businesses to better handle cash flow and potentially save on the cost of capital, even with higher interest rates.
Who Business Lines of Credit Are Right For
A business line of credit is one of the most popular fast business loans. Because it is revolving, businesses can continue to draw as needed and repay, and repeat the cycle as often as is necessary. This makes it appropriate for retail businesses, businesses with sales that fluctuate seasonally, and manufacturing and other situations where there are commonly long delays between order acceptance, fulfillment, and payment.
A line of credit can solve most cash flow issues faced by small businesses, and is typically a more cost-effective method of managing ongoing cash flow than invoice financing. In almost every conceivable case, a line of credit will be cheaper and more sustainable than a merchant cash advance.
Business Line of Credit Costs
Typically, draws are at a variable interest rate (often tied to the prime rate). A business may sometimes be able to lock the rate at the time it is drawn. Some lenders will charge an annual fee on a business line of credit. In many cases, this can be waived if the business draws a certain amount. Wire fees may apply for businesses that need immediate access to funds. In many cases, interest-only payments may be made during the draw period.
Some typical line of credit costs are:
- Interest rate: 4% to 25%
- Estimated APR: 10% to 80%
- Origination fee: None
- Ongoing fees: Annual fees may apply up to $500; wire fees may apply up to $25
Borrowers will want to pay attention to how interest rates are calculated, as with any form of borrowing. While lenders list rates as low as 4%, these are often the total simple interest if the line is paid off within a shorter term, and actual APRs will start around 10% and may run as high as 80% depending on the lender and the borrower’s qualifications.
Business Line of Credit Terms
Business owners should expect to see wide variances among line of credit terms, depending on the lender as well as borrower qualifications. In some cases, repayment of a line of credit may be due in as little as 12 weeks, while in other cases, a line of credit may be repaid over an indefinite period of time.
Most commonly, lines of credit come with repayment terms between 12 and 24 months. Traditional bank lines of credit usually have a monthly repayment frequency, while alternative business loans often require repayment weekly.
General terms for line of credit are:
- Speed of funding: One to three days
- Funding amount: Up to $250,000
- Term length: Three to 24 months
- Repayment frequency: Weekly or monthly
Like most of the options on this list, getting approved for funding may initially take a few hours, with funding available as quickly as the same day by wire transfer, although in many cases it may take a few days for approval and funding to take place. A key advantage of a line of credit, then, is the ability to access subsequent cash on-demand and virtually instantaneously through a simple wire transfer.
Unlike invoice financing, where there is some underwriting involved for every advance based on the customer, a business line of credit is unsecured, and immediate access is granted to the total line of credit for the borrower to tap at any time. While a merchant cash advance (MCA) may offer similar instant access to funding, very rarely will it be able to compete on cost of capital.
Business Line of Credit Qualifications
Qualifications for a line of credit will range depending on whether the lender is a bank or an alternative lender. Most alternative lenders will accept bad credit as low as 550; however, many banks require good or even prime credit in order to qualify. Additionally, while alternative lenders will approve newer businesses with lower annual revenues, banks will typically require at least a year in business and annual revenues starting at $100,000.
Average minimum qualifications for a line of credit are:
- Credit score: 550 or higher
- Time in business: Six months or more
- Annual revenue: $50,000 or more
While a business that meets only the minimum qualifications can get approved, the amount of funding is likely to be low, and corresponding rates will be toward the top of the range. Businesses that need access to higher amounts may wish to take advantage of the more lenient qualifications offered by invoice financing, which may allow access to greater funding as well as more competitive rates.
What Business Lines of Credit Are Missing
While a business line of credit is often a very competitive way for well-qualified businesses to access to inexpensive working capital, for marginally qualified borrowers and businesses, it can be an expensive form of financing that trades on its convenience. For businesses that don’t need ongoing access to capital—for example, funding for specific projects or equipment—SBA loans, equipment loans, or equipment leases may be more cost-effective forms of securing capital.
4. Merchant Cash Advance
A merchant cash advance (MCA) allows businesses to borrow funds short-term by leveraging existing credit card receipts. Lenders advance cash to the business, and in return take a percentage of future receipts on a daily basis until the advance has been repaid. MCA providers tout the benefits of quick access to capital (it is one of the fastest forms of same day business loans) and lenient credit requirements; however, borrowers should know MCAs are expensive, potentially creating cyclical debt for businesses that is difficult to repay.
Who Merchant Cash Advances Are Right For
Merchant cash advance providers list a host of different scenarios where an MCA is suggested, while most financial professionals consider the cost of capital to be too high compared to other forms of financing, with APRs typically exceeding 80%. An MCA should typically only be considered as a last resort for a business that has attempted to access less expensive capital.
For businesses able to avoid cyclical borrowing, meaning it can pay off the MCA and will not need to borrow again in the foreseeable future, an MCA can be better than the alternative of not borrowing at all. For businesses that fall into a borrowing cycle, MCAs are likely to quickly cut so deeply into profits that the business is no longer able to sustain itself, so business owners should be particularly wary.
Merchant Cash Advance Costs
MCAs are one of the most expensive types of capital available to businesses and are often compared to payday loans. The cost of capital is not an interest rate but rather a factor rate. What this means is that for every $1 borrowed at a factor rate of 1.5, the business would need to pay back $1.50. This means the cost of capital is the same whether the funds are paid back in one month or one year.
Some typical merchant cash advance costs are:
- Cost of capital: 1.1 to 1.5
- Estimated APR: 80% to 120%
- Origination fee: A setup fee of 2% or more may be charged
- Ongoing fees: An advance fee of 2% or more may apply
It is critical in any financing transaction to review interest rates and other charges while paying attention to the long-term costs of carrying debt. MCA contracts may contain charges not factored into the cost of capital that will nonetheless significantly impact the costs of borrowing. Borrowers should compare not just the cost of capital but also whether any additional fees will be charged that may impact total costs.
Merchant Cash Advance Terms
Payments are deducted automatically from credit card receipts on a daily basis. In addition to a factor rate, borrowers agree to a specific holdback percentage for the advance, which typically falls between 8% and 30%. The holdback percentage significantly impacts the total daily payment, but has no impact on the cost of borrowing.
General terms for merchant cash advance are:
- Funding speed: Two to five days
- Funding amount: $5,000 to- $500,000
- Term length: 12 to 24 months
- Repayment frequency: Daily
A company with $500 in average daily credit card receipts and a 10% holdback would have a daily average payment of $50. If that company borrowed $10,000 with a 1.2 factor rate and averaged $1,000 in payments each month (assuming $10,000 in credit card receipts each month), it would take 12 months to pay back the advance.
For companies experiencing cash flow issues, the size of the holdback may be of significant concern. For example, a company with a 30% holdback and all else equal would net only $700 from daily receipts of $1,000 and only $7,000 in revenue on monthly receipts of $10,000. However, the advance would be repaid in a much shorter time frame of four months.
Merchant Cash Advance Qualifications
Qualifying for an MCA is typically quite easy for companies with any significant daily credit card volume, which makes it a popular bad credit business loan. Seasonal businesses can also qualify, but may have a higher holdback percentage to ensure the lender is paid back in a timely manner.
Average minimum qualifications for merchant cash advance are:
- Credit score: 500 or higher
- Time in business: Three months or more
- Monthly revenue: $2,500 or more
Ultimately, one of the most attractive aspects of an MCA is the ease in qualifying for any business with credit card receipts. Most businesses are likely to qualify, and not all MCA providers require a minimum credit score, although virtually all have a minimum monthly revenue requirement and want to see at least three months of receipts to determine whether and how much to advance.
What Merchant Cash Advances Are Missing
An MCA—when used appropriately—can give a business rapid access to critical capital and help that business cover operational expenses such as payroll, equipment repair, short-term inventory needs, and other one-time funding needs. Where an MCA falls short is its affordability for a business long term. For businesses that need a continued source of funding, MCAs have high borrowing costs that quickly eat into margins, making it an unsustainable long-term funding option.
Businesses that are not able to access a more effective form of longer-term financing should also evaluate invoice financing as well as invoice factoring. With lower overall costs of capital, while not ideal long-term funding options, either form of lending will potentially allow a business to retain a greater percentage of its revenue.
Short-term Business Loan Providers
Short-term business loans are available through a variety of different lenders, including traditional banks, online lenders, and peer-to-peer lenders. Some types of short-term business loans are only available through alternative lenders, such as merchant cash advances and invoice financing. Choosing the right provider will depend on a business’ qualifications, including borrower credit score, minimum revenue, and the type of financing being sought.
Short-term Business Loan Providers
Short-term loan; Line of credit
Short-term funding up to $250,000
Up to $100,000 with 670+ credit, $100,000+ revenue
Line of credit; Invoice financing
Advances and lines of credit up to $100,000
Advances up to $250,000 with no additional fees
Newer businesses with at least six months operations
BlueVine offers several types of short-term business loans, including short-term loans, lines of credit, and invoice factoring. Its short-term loans and lines of credit offer between $5,000 and $250,000 with repayment terms of six or 12 months and average APRs ranging between 18.2% and 78%. It’s expensive relative to traditional bank term loans, but a good option for borrowers with less than perfect credit.
Bank of America
Bank of America offers a host of short-term business financing options, and has some of the most competitive terms offered for short-term loans. Borrowers with at least a 670 credit score and revenues of $100,000 or more that have operated their business for at least two years can access interest rates in the mid-to-high 5% range.
Fundbox offers short-term financing with APRs ranging from 10% to 79% on lines of credit up to $100,000, and invoice financing for up to 100% of the total invoice up to $100,000, with APRs between 10.1% and 78.6%. Borrowers should have at least a 500 credit score to apply for both types of financing.
National Funding provides access to merchant cash advances with no other fees, making it one of the more competitive options for businesses that need to borrow against credit card receipts. With a factor rate between 1.17x and 1.36x, borrowers can expect APRs between 30% and 150%. National Funding also requires at least $36,000 in annual revenues and a year in business, but no credit score minimum.
Fora Financial offers merchant cash advances to businesses with as little as six months in operations and no minimum credit score on monthly credit card receipts of at least $5,000. Fora’s factor rates typically range between 1.1x and 1.3x. Unlike National Funding, Fora may charge origination fees between 1% and 4% of the amount borrowed, so actual APRs are likely to fall between 35% and 175%.
Pros & Cons of Short-term Business Loans
Like any form of business financing, short-term business loans have both advantages and disadvantages. Among the advantages are the ease of qualifying relative to some long-term financing options, as well as the ability to quickly access critical cash. Some disadvantages include the frequency of repayment, relatively high costs, and the risk of entering into cyclical borrowing, which can be difficult to escape.
Pros of Short-term Business Loans
Some of the advantages of short-term business loans include:
- Short-term debt: Businesses that have a one-time need for short-term financing can save on overall borrowing costs by not carrying the principal over a longer period of time.
- Easier to qualify for: A main advantage of short-term business loans is the relatively lower credit criteria that lenders require in order to approve funding.
- Fast access to emergency capital: In many cases, short-term business loans are accessible in as little as one day, besting the funding speed of longer-term financing options by days, weeks, or even months.
- Build credit: Short-term financing—like short-term loans and lines of credit—help build credit, putting businesses in a better position for eventual long-term financing needs.
Cons of Short-term Business Loans
Some of the concerns regarding short-term business loans are:
- High costs: Many types of short-term business loans have very high borrowing costs, including APRs that can range from 30% in some cases to over 100% in others.
- Frequent repayment: Many short-term loans require repayment daily or weekly, which can cut into a business’ cash flow and even encourage additional borrowing in order to cover other expenses.
- Impact to ability to borrow: Many short-term forms of financing can negatively impact a business’ ability to borrow from other lenders, especially banks. In some cases, a UCC lien may be attached to a business’ assets, hindering borrowing further.
- Encourages cyclical borrowing: Cash flow is impacted, which may create scenarios where businesses need to continue to borrow (exponentially in some cases) in order to service the growing costs of borrowing.
Short-term business loans can give businesses quick access to needed capital in the case of one-time needs. However, short-term financing can be very expensive, and continuing to use short-term loans over longer periods of time will lead to higher borrowing costs. Business owners should carefully consider the financing need, as well as the length of time funding will be needed, when choosing between types of short-term loans.
BlueVine offers short-term loans up to $250,000 to borrowers with at least a 600 credit score and six months in business. Repayment terms of six or 12 months are available, and an application takes less than 10 minutes, with same day funding available and simple interest starting at 4.8%.