What is a Short-term Business Loan and How Does It Work?

What is a Short-term Business Loan and How Does It Work?
A restaurant owner packages food for take out.

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If you like to keep your business agile, you might have steered clear of business loans. You don’t want to be dealing with debt payments years — maybe even decades — down the road.

But if a lump sum of money could make a difference for your business, a long-term loan isn’t your only option. With short-term business loans, you can get the cash you need now, usually very quickly, and be done paying off what you borrowed in a couple of years or less.

Before exploring the best short-term business loans, though, you should know a few key things about this financing option.

Short-term small business loans are funds your business borrows and pays back at a quick clip. Usually, these loans come with repayment terms of three to 18 months, though you can find some options with repayment schedules lasting two or three years.

Here are a few important things to know about this type of business financing:

  • Banks and credit unions may offer short-term loans, but they can take days and weeks to fund.
  • Online lenders typically offer fast short-term loans. Depending on the lender, you may be able to secure fast short-term business loans as soon as one to three business days.
  • Online lenders usually have looser qualification requirements, making them accessible to startups and business owners with bad credit.
  • On the flip side, because short-term loans are so accessible, business loan interest rates are usually higher than longer-term loans.
  • You may have to make repayment on your loan more frequently than with a traditional loan, often on a daily or weekly basis.

Bankrate insight

The true cost of a short-term business loan depends on several factors, including the type of loan and your credit score. And if you have fair or bad credit, you may have to watch out for loans that use factor rates instead of interest rates to calculate the cost of a loan. Learn more about it, including why you should convert factor rates to interest rates.


Short-term business loans vs. long-term business loans

Long-term business loans come with longer repayment terms, usually anywhere from seven to 25 years. Rates are usually much lower compared to short-term business loans. That longer repayment schedule can help to facilitate a larger loan, plus it can mean making less frequent payments and keeping those monthly payments down.

The downside to long-term loans is that you will likely pay more interest since you hold on to the loan longer.

Bankrate insight

If the repayment periods for short-term loans are too quick for you, check out our guide on alternatives to short-term business loans to see what other options are available.

Short-term small business loans work a lot like other types of loans. The lender gives you a lump sum of money, usually in exchange for some sort of business collateral (unless you take out an unsecured loan, which would usually translate to a higher interest rate).

Like other loans, you repay what you borrow in the schedule laid out by the terms of your loan. Unlike other loans, that timeline is brief. Usually, short-term business loans have terms of 18 months or less. Depending on the type of short-term business loan and lender, you may have to make daily or weekly repayments to repay in that short time.

Online lenders primarily offer these loans. They can usually process your application quickly (within 24 hours in some cases). And once approved, money usually hits your account same day. Be prepared for higher short-term business loan interest rates in exchange for that expediency.

As with most business loans, short-term small business loans often come with administration/origination fees. And they come with consequences if you default, including late fees, a demand for repayment in full and potential seizure of any assets you used to secure the loan.

Your credit score will also take a huge hit. Not only do negative marks stay on your credit report for seven years or longer, but you’ll also only have access to limited types of bad credit business loans if you ever need financing.

The reasons you might consider a short-term business loan are probably as unique as your business itself. Here are a few common use cases for short-term business loans:

  • Dealing with emergency expenses. Maybe a key piece of equipment just broke or a natural disaster impacted your office. To get the money you need to handle the unexpected, fast short-term business loans can come to the rescue.
  • Covering seasonal cash flow dips. Does your business have boom seasons followed by leaner times? Short-term small business loans might be worth exploring if you need help weathering a seasonal slump.
  • Seizing a business opportunity. If bringing on headcount could help you service an exciting new client or making a big inventory purchase now could help you land a sizable discount, you might need a lump sum of liquid capital your business doesn’t have. With a short-term loan, you can get that cash in hand to lean into the growth opportunity.
  • Getting financing with bad credit — Because this type of financing usually comes with looser eligibility requirements, it can be an option for a bad credit business loan.

You can get a short-term business loan with banks or online lenders, but banks may take far longer to fund.

Online lenders are relatively new companies that leverage financial technology (fintech) to power their processes. As a result, they can usually work faster and more flexibly than traditional lending institutions. In exchange, you’ll generally pay higher short-term business loan interest rates as a borrower.

Bankrate insight

For more information on lenders that offer short-term business loans, including their advantages and disadvantages, check out the following reviews:

Bottom line

Short-term business loans can offer business owners funding to bridge a brief gap in their cash flow. You’ll generally get the money fast, but you’ll also need to repay it quickly. Evaluate your cash flow and make sure you can keep up with the rapid repayment cadence that comes with these types of loans.

  • These loans can be a good option for owners who need a lump sum of cash now but don’t want to be saddled with long-term debt. They can also be a good option for businesses that wouldn’t qualify for long-term business loans, like new startups and companies with bad credit.

  • These loans typically come with a repayment term of anywhere from six to 18 months, but some lenders offer loans with repayment periods of 24 to 36 months.

  • The short-term business loan could help you deal with cash flow issues, seize a business opportunity knocking at your door or deal with an emergency.