How to Choose the Best Short-term Business Loan
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Short-term business loans can be great if you need cash for emergencies or to cover temporary cash shortfalls. These loans typically have repayment terms from three to 18 months. This can help cut down on the cost of interest but require larger payments than loans that stretch out three years or longer.
Choosing a short-term business loan option may take time and research. The best short-term business loan will likely be different for each business. The loan size you need, type of loan you want, your business credit score and other eligibility factors will all play a part in pointing you towards good short-term business loan options for your business. Keep the following in mind as you go.
How much can you afford?
With any business loan, you need to know how much loan you can afford before you apply for the loan. You will need to make regular payments on the loan, including interest. Plus, short-term business loans typically come with administration or origination fees and penalty costs if you default.
Short-term business loans usually have higher interest rates than other business loans, and may require daily, weekly or biweekly payments.
Consider all these costs as you determine how much loan you can afford. Consider how quickly your cash flow may increase to help you repay the loan. If you don’t predict more cash coming your way soon, you may have trouble making payments on the loan. Use a business loan calculator to understand how much the loan could cost you and what your regular payments will be.
What type of short-term business loan?
There are several types of short-term business loans. Look for the loan types that fit your business needs best. Consider how each loan type fits your needs by credit score, loan amount needed, repayment terms and other important factors.
| Loan type | Description |
|---|---|
| Term loan | These are the most common types of loan. They allow you to borrow a lump sum of money and repay it regularly over the agreed repayment period. |
| Lines of credit | Lines of credit work similar to a credit card, but typically have higher spending limits. You receive a specified credit limit and draw period. During this time you can borrow and repay up to your credit limit as much as you need. Once the draw period ends, you enter a repayment period and must make regular repayments until your full debt is repaid. Lenders may charge interest during the draw period, but some lenders don’t charge interest until you enter the repayment period. |
| Invoice financing/factoring | Both invoice financing and invoice factoring allow you to leverage your unpaid invoices to borrow money. With invoice factoring, the factoring company takes over your unpaid invoice, pays you most of the amount you are owed, and takes out a percentage of the amount as payment. The client pays the invoice factoring company when they pay the invoice. With invoice financing, your unpaid invoice acts as collateral for the loan. A lender gives you an advance up to 85 percent of the invoice amount. You must repay this amount once the client pays the invoice. |
| Merchant cash advance | A merchant cash advance (MCA) can help cover temporary cash flow issues, but it comes with some of the highest fees around. An MCA is a lump sum loan offered by online lenders and is paid back by taking a percentage of your credit card sales. Instead of interest, you are typically charged a factor rate. |
Bankrate insight
Factor rates use decimals instead of percentages to calculate total costs of a loan. To make sure you understand how expensive they can be, convert factor rates to interest rates and compare costs.
What’s your credit score?
Lenders evaluate both the personal credit score of the business owner and the business credit score to determine eligibility for a business loan. Personal credit scores show how well you have managed debts and payments individually, and this helps lenders predict how well you will manage business debt.
If your business is young, you may not have a business credit score. But if you have a business credit score, lenders will also look at this to see your business’s payment history and debt management capabilities.
There are multiple methods for evaluating credit scores. The most common credit score type used for evaluating individual credit is FICO credit score. Scores are determined by looking at reports from the three major credit bureaus: Equifax, Experian and TransUnion. To get a short-term business loan, most lenders look for at least a 600 FICO credit score. The higher your score, the better interest rates you can find.
Business credit scores may be evaluated through several different methods. Dun & Bradstreet is one of the most popular evaluators of business credit scores. It rates business credit on a scale from one to 100. Business credit may also be measured by FICO Small Business Scoring Service (SBSS). This method rates business credit on a scale from zero to 300.
How to improve your credit score
If you have a low credit score, there are multiple steps you can take to improve both personal and business credit scores. Taking measures to improve your payment history, increase the amount of credit you have and clear up any mistakes in your credit report can quickly boost your score.
| Pay your bills on time | A timely payment history will help your business and personal credit scores. This accounts for 35% of the calculation of FICO credit scores. |
| Up your credit limit | Requesting an increase in your credit limit may temporarily cause a dip in your credit score. But when a credit increase is granted, the increase in credit utilization can boost your score in the long run. |
| Dispute errors | Sometimes errors show up on a credit report. It’s important to look through your credit report if your credit score seems off. You can dispute errors with the credit bureau and get them removed, which will increase your score. |
| Register as a business | For business credit scores, start by establishing your business. Register your business as a limited liability company, corporation or partnership. Then, register for an Employer ID Number (EIN) to keep your business finances separate from your personal ones. Finally, register a DUNS number with Dun & Bradstreet to establish credit with them. |
| Open a business bank account and credit card | Once you’ve registered your business, open a business bank account and credit card to establish a payment history and utilize your business credit. |
Which lender?
There are lots of different short-term loan options out there. Some may offer convenient online access but have higher interest rates. Other lenders may have the most favorable interest rates and repayment terms but have strict eligibility requirements and are slow to provide funds.
Finding the right option for short-term loans can be particularly difficult as the short repayment periods give you less flexibility. Consider which features are most important for your business needs.
Fast short-term loans
Where to look: Online lenders
Online lenders have streamlined applications. You can receive a response within minutes, and loans can be in your account within one to three days. But rates and fees tend to be higher than long-term loans.
For more information: Check out our guide on the best fast business loans to see who offers the fastest funding and the best rates.
Low interest rates
Where to look: Banks and credit unions
Banks are known for offering low rates and flexible repayment terms. The downside is that they focus on lending to established businesses with credit scores of 650 and above. They also are slow to provide funds.
For more information: Check out our guide on the best banks for business loans to see some of the lowest rates around, top SBA loan providers and lines of credit that earn rewards on purchases.
Large loan amounts
Where to look: Banks
National banks have more resources and often offer larger loan amounts to qualifying applicants. Find options for loans of at least $250,000.
For more information: Some online lenders like SMB Compass are known for offering generous loan amounts of $1 million and higher.
Options for bad credit
Where to look: Online lenders
Online lenders offer multiple types of business loans for bad-credit borrowers. This includes lines of credit, invoice financing and merchant cash advances. These can all be helpful if you have fair or bad credit, but the interest rates and fees can derail your business if you’re not careful.
For more information: Check out our guide to the best bad credit business loans to see lenders willing to work with business owners with scores as low as 550.
Are you eligible?
Many business owners are attracted to short-term business loans because they have looser eligibility requirements than typical business loans. This makes them a good fit for new businesses or businesses with bad credit.
But you will still need certain eligibility requirements to qualify for one of these loans. Expect that lenders will require a credit score of at least 500. The lender will also likely need to see your business license and financial records.
You may also need to provide a personal guarantee and/or collateral. A personal guarantee states you will take personal responsibility for the loan if the business can’t repay it. You provide collateral as a guarantee that you will repay the loan. The lender can seize your collateral if you default on the loan. This could be anything from business equipment or a business vehicle to any real estate that business owns.
Compare top lenders
If you’re not sure where to start when looking for a short-term loan, here is a look at some of the popular choices for banks and online lenders.
Short-term loans from banks
Getting a short-term loan from a bank can be great if you want the low interest rates and flexible loan options. However, they don’t always cater to convenience. You will likely have to visit a local branch or pick up the phone to apply for your loan.
Main features:
- Multiple loan options
- High loan amounts
- Physical location for bank
- Loan approval may take multiple days
- Flexible options for repayment periods
| Lender | Loan type | Features |
|---|---|---|
| Bank of America | Term loan |
|
| Wells Fargo | Lines of credit |
|
Short-term loans from online lender
Online lenders offer a lot of convenience. You can apply for and manage the loan online. You will hear back about a loan application quickly, often within the same day.
Main features:
- Flexible lending guidelines that cater to bad credit
- Quick approval and lending timeline
- Higher interest rates than banks
- Usually have more fees
- Convenient online access to information and loan account
| Lender | Loan type | Features |
|---|---|---|
| Credibly | Working capital |
|
| OnDeck | Term loan |
|
| Fora Financial | Term loan |
|
| Bluevine | Line of credit |
|
Bottom line
A short-term loan can be a great business loan option if you need cash but don’t want a long-term loan option. Choosing the best short-term loan option depends on your specific business needs. Consider what both traditional lenders and online lenders can offer. Look at multiple loan options to find the one that best fits your eligibility and business needs.
Frequently asked questions
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Short-term business loans can be paid off in two years or less. Specific term lengths can vary between lenders. Online lenders typically offer options that can be paid back in 18 months or less. Banks can have repayment terms that last anywhere from 12 to 60 months.
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Yes, you can borrow money without collateral. There are two main types of loans: unsecured loans and secured loans. Secured loans require collateral to secure the loan. Unsecured loans do not require collateral but may require a personal guarantee.
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Yes, a business line of credit is considered a short-term loan. It works similar to a credit card where users can borrow up to a certain limit. They can repay what they spend and may continue to use and repay the line of credit as needed.
