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Short-Term Loans

Jason Smith

Jason Smith

Senior Author

Jason Smith

Senior Author

If you’re a small business owner, you’re probably well aware that different forms of spending require different lending solutions. The way that you attain finance will depend on what you will be using your capital for. The modern world finance has created a few unique lending products that have been designed for different purposes. In fact, there are so many different lending products on the market that it can be difficult to actually decide which one to use.

Short-Term Loans

One of the most traditional forms of lending for a business is a term loan. Term loans consist of a fixed interest rate that is paid back over a set period of time (term). This is typically paid back over five to eight years, depending on the loan. To some people this seems like a rather large financial commitment. You don’t want to have a loan which you are still responsible for paying back in five years. For example, if you bought a piece of equipment that you know would only last two years, you wouldn’t want to finance it over five years – you’d still be paying for it long after it was no longer useful.

That’s why short-term loans have come into play. They’re like a traditional term loan, except the term time is much shorter, making them a more realistic option for certain purchases. If you think that you want to finance something, but don’t want to be locked into a long term financial contract, a short-term loan might be right for you. We’ve compiled this page to give you the tools you need to understand how short-terms loans work and how they may be useful for your business.


Brief Background

So, what differentiates a short-term loan from a regular term loan? As mentioned previously, a short-term loan is simply a term loan with a much different term time to a traditional loan. A short-term loan’s payment period is typically between three and 18 months. Interest rates can get quite high — starting around 10%. However, you can borrow amounts between $2,500 and $250,000 and get approval in as quick as 24 hours.

While annual costs can get higher, you will appreciate the set payment structure that allows you to plan ahead. Not much paperwork is required and low credit scores are still considered. You can use short-term loans for a wide variety of business purposes. Payments are usually made daily or weekly over the time period agreed upon.

You will be glad to know as well than even if you’ve been in the business for just over 6 months, you are still more than welcome to apply.

Short-Term Loan Basics

Compared to traditional term loans, short-term loans are easier to attain simply because it is quicker — in as little as a day you can get approved, and it requires not nearly as much paperwork. You might not even have to present your balance sheet to the lender. This being said, there will be basic documentation that you have to provide in order to prove your viability.

While having access to instant cash that your company can use immediately is always an advantage, you must know that short-term loans are one of the most expensive loan types for small business owners. There are disadvantages attached to this loan type, such as higher factor rates and more frequent payments. It can be challenging, especially if your revenue comes in bi-monthly or monthly.

Interest rates in short-term loans are called factor rates. The lender’s factor rate is multiplied to the amount of your loan and the total will be the price you pay.

Here’s an example: a lender with a 1.2 factor rate lends you $25,000. $25,000 x 1.2 = $30,000. You will be getting $25,000 upfront but you have to pay $30,000. Let’s say you pay back the entire amount within 12 months and there are 22 business days monthly, that goes down to 264 payments, assuming you will be making daily payments. That’s roughly $113.63 per day for 264 days over 12 months.


But Short-Term Loans Are Expensive

Yes, we understand that you’re thinking that short-term loans are way pricier compared to other loan products. But then again, let’s go back to the fact that even if you don’t have a good credit standing or a stable business history yet, you can qualify. You’re also trying to get a large amount of money quickly – something that you can’t do with a regular loan. To get the amount of money you’re asking for with relatively little hassle, you must be willing to pay.

You must be wondering now if it’s even worth it. Why are other small business owners still taking short-term loans if it’s way too expensive? Basing on the numbers in the example above, that’s an extra $5,000 on top of just $25,000 you are borrowing – and you have to pay it back in just a year. Allow us to give you another scenario to help you understand better:

You own a printing company that’s barely a year old. You don’t have an attractive credit score and not much to prove when it comes to your business history. Yes, you have many regular customers, but you haven’t really gotten your big break yet. One day, a marketing executive from a huge corporation comes in and asks you to print 20,000 brochures that they will be handing out to their clients. This is a massive deal for you because you haven’t received such a large order from one client. The executive even says that if you do a great job, you will be given more orders in the future. You can’t let this opportunity pass.

You are now caught in a predicament as to whether you should accept the order. You know for a fact that the raw materials you have such as paper and ink would only be enough for about a thousand brochures. You need to place an order from your supplier who always requests upfront payments. That marketing executive is willing to make a 10% down payment on the project and nothing more. You won’t have enough cash to fund the project. By the way, the project will be paid in full, 30 days after you have completed the job.

Will you let go of this huge opportunity simply because you don’t have enough funds to finance new materials? Or would you rather take a short-term loan to help you buy those materials now and pay for them later? We’re pretty sure that if a short-term loan is within reach and that’s the only to attain funds straight away, you’ll take advantage of it.

Short-term Loan Advantages

After reading the majority of this page, you probably have a pretty basic idea of if you think a short-term loan is right for you. We’ve made this section so you can have a quick overview of all the benefits that are associated with short-term loans. A full list of advantages is provided below:

  • Short-term – The most obvious advantage is that the loans are short-term. You’re not locked into a long commitment that will hamper your ability to expand in the future. It gives you the added flexibility you need to pay off your loan quickly without the stress of a long term financial arrangement.
  • Online Lenders – Short-term loans are traditionally arranged through online lenders, which means that the application process can be done entirely through your computer. In addition, you can upload all your documents directly to their website.
  • Fast Funding – Short-term loan providers are well known for getting their clients capital as quickly as possible. Many business owners have been able to get funding in as little as 24 hours – a huge benefit considering that many traditional lenders can take weeks (or even months) to get you your money.
  • Structure of Term Loan – Because short-term loans are effectively a much shorter traditional term loan, they benefit from the structure of a term loan. This means that you normally have a fixed interest rate and that the term is structured so that you can plan for payments and better organize your business.
  • Eligibility – Short-term loans tend to sound like a form of loan that would be hard to acquire, but this is actually not the case. Because the interest rates attached are quite high, short-term loans are actually much easier to get than traditional loans. This is especially true because online lenders tend to lend money to borrowers much easier than traditional commercial banks.

Short-term Loan Disadvantages

While there are many advantages to getting a short-term loan for your business, there are also a few drawbacks to consider. Make sure you understand each of the point mentioned in this part of the page before you make any decisions. A full list of the most prominent disadvantages is provided below:

  • High Interest – The most obvious disadvantage associated with short-term loans is the high interest rate attached to them. The interest rates will depend on your lender, but they tend to be higher because lenders know they won’t benefit from the interest over a long term.
  • Online Lenders Only – This was mentioned as an advantage, but it can also be a disadvantage depending on the way that you look at it. Because short-term loans are primarily given by online lenders, it leaves you with less choice than if you had a range of different financial institutions issuing them.
  • Credit Checks – If you’re shopping around for short-term loans, there’s a chance that you might get hit with some credit checks. This can damage your credit score, so it’s important to not apply for too many, which can be difficult if you’re shopping around for different online lenders.
  • Fees – If you miss payments you may be responsible for paying rather large fees. This can be a bit of a problem if your payments are quite high and you end up missing a few of them. Make sure that you’re able to afford the loan or you may end up costing yourself even more.

Common Short-term Loans Uses

So, you may be wondering: what do people actually use short-term loans for? The answer is that people use short-term loans for a range of different things in their business. We gave an example in one of the sections above, but that was just one example of how these loans help local businesses.  This section is devoted to helping you understand the practical uses that many short-term loans are used for.

Certain Machinery

Some machinery doesn’t have a long lifespan – business owners recognize that they don’t want to be paying for machinery long after they are gaining any benefit from it. If you have machinery or equipment in your business that you know won’t last more than 18 months, you may want to consider a short-term loan. It allows you to better plan the amount of value that you are getting from your investment.


Another common use for a short-term loan is inventory. Many business owners operating in retail have to adjust their inventory levels depending on the season. If you feel that you will have a busy season coming up shortly, you may get a short-term loan to purchase additional inventory to sell. This allows you to invest in your inventory count without tying yourself up to a long term loan.

Fixing Assets

Let’s say a piece of machinery or equipment breaks down – as a business owner you need to be able to respond to this quickly. Not doing so will lose you money and potentially impact your client base. Business owners use short-term loans to fix equipment. Because short-term loans are easy to get and supply business owners with quick funding, they’ve become extremely popular with some companies.

Additional Staff

Just like with inventory, sometimes you may need to hire additional staff to help cater to an increase in demand. Short-term loans will give you the flexibility you need to hire additional staff without taking on a long term financial commitment. Businesses use this to help adapt their staff numbers all the time.


Are You Qualified to Get Short-Term Loans?

Qualifications for short-term loan applicants are pretty simple. You need a stable and consistent cash flow. While your other financial documents and history can affect your application for a traditional term loan, short-term loan lenders choose winning applicants with less documentation. They simply look at your cash flow to ensure that you will be able to make regular payments.

Note that while low credit scores and less established businesses are welcome to apply for a short-term loan, the amount of interest you will be required to pay, as well as the cash amount that you can borrow, still depend on those factors. Having a good business history with a high credit score will go a long way in helping you get approved for a short-term loan.

Based on experience, the average annual revenue of our clients who were approved for short-term loans were in business for more than a couple of years with a credit score of 600. They also had more than $150,000 in annual revenue. Don’t let these figures discourage you though. As we said, you still have a chance even if you don’t have such stellar credentials. So yes, start up loans for bad credit do exist.

Who Offers Short-term Loans?

Short-term loans are a unique financial product in that they aren’t offered by many of the large commercial banks. This may sound strange, but it’s because large commercial banks tend to prefer clients who lock into long, sustainable financial products. Instead, short-term loans are largely offered by online lenders. The recent developments in financial technology have allowed for a range of online lenders to enter the space – there is now significant competition in the short-term loan market.

If you are thinking of getting a short-term loan, you can head online to a range of different lenders and compare the interest rates that they’re offering. The great thing about online lenders is that you don’t have the same headaches you’d normally have with a traditional lender. For example, traditional lenders will require a great deal of documentation, and typically want you to come in for a face-to-face interview before issuing a term loan. In addition, traditional lenders can often take weeks to come to a decision, which may not be possible for you if you need money quickly. Online lenders have portals that you are able to directly upload documents to – it takes away a lot of the hassle of traditional lending. They also can give you instant decisions and are much quicker at getting the money in your account.


There are two alternatives you can use to a short-term loan if you feel that you don’t want to take on the extra interest rates or work with an online lender. Many business owners already have accounts with their local commercial banks and want to keep their financing in-house. You can still find ways to get a form of short-term loan without having to use an online lender.

If you apply for a regular term loan, you can then decide to pay back the loan early. You can do this by either paying a lump sum, or simply paying larger payments every month. This allows you to use a larger bank and take advantage of lower interest rates. The only downside is that some lenders may charge you a fee for paying back early, as this means they miss out on the future interest payments on the loan. Still, this can end up being cheaper than a short-term loan. Talk to your lender about what fees or charges are associated with paying the loan off early. In addition, keep in mind that you may struggle a bit more to qualify for a term loan if your credit score is low.

If you find out that this option will end up costing you more money than a short-term loan, or if there are any other problems with getting a term loan, there is another option. You can also apply for a business line of credit. A business line of credit is a form of revolving credit – the same form of credit that a credit card falls under. With a business line of credit, you are approved for a pre-set limit but you only pay back the money that you use. Interest rates can be quite high, but if you are looking to pay back the loan quickly this will most likely not be an issue. In fact, many business lines of credit have interest rates that are around the same a short-term loan – they’re a viable option if you find the right one. Unlike credit cards, a line of credit give you access to cash at no additional cost – a great benefit if you need cash to pay a bill or buy inventory.


After reading this page, you should have a solid understanding of short-term loans and how they work. You should also be well aware of how you can get a short-term loan if you feel that it’s a good fit for your business. But there are a few other things about the process that are worth warning borrowers about. If you do decide you want a short-term loan, make sure that you give yourself enough time to make a well-informed decision. Rushing into a form of finance can end really badly for business owners – there are a range of different options so it’s very important to consider all of them. You should contact a range of different lenders and ask for quotes – it’s the best way to make sure that you’re getting the best deal possible. But make sure that they aren’t doing a hard check on your credit for each quote, this would do considerable damage to your score.

Make sure that you look up any online lenders and their customer reviews prior to handing over any personal information. There are plenty of predatory companies in operation that are trying to take advantage of borrowers looking for capital. If a lender doesn’t have an online presence, they’re not worth working with – make sure that you can see verified reviews on consumer watchdog groups.

Lastly, ask for a total cost of the loan prior to making any agreements. There are often hidden fees and charges associated with term loans. By not understanding the total cost of the loan you could be in for a nasty surprise once your bill comes. Remember, finance is a key part of the success of your business, you should approach it with as much attention to detail as you would with any other investment decision.


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