Short-Term Finance: The Ultimate Guide for Small Business Owners

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Short-Term Finance: What You Need to Know

If you’re looking for funding for your business—whether lines of credit, invoice financing, or general business loans—you’ll likely come across the phrases “short-term finance” and “long-term finance,” among many other categorizations used to differentiate financing products.

This being said, as you explore your funding options, it’s important to understand how short-term finance works, how it compares to long-term finance, and what short-term financing products are available to your business.

We’re here to help. In this guide, we’ll explain the short-term finance definition in greater detail, discuss the most common types of short-term financing, as well as which lenders can offer the best short-term products for your business. Plus, we’ll break down the pros and cons of short-term financing so you have all of the information you need to decide what’s right for you.

Let’s get started.

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Short-Term Finance Definition

We’ll begin with the basics—what exactly is short-term finance?

Short-term finance can be defined as any financing that a borrower pays off over a shorter repayment period. More specifically, though, short-term finance refers to any loan that a business pays off in under a year. This being said, however, some lenders label products with 18-month repayment terms as “short-term business loans.”

Beyond this simple definition, short-term financing will come with additional distinguishing characteristics. Namely, this type of financing is quicker to fund, easier to qualify for, and has a lower total cost of capital. Generally, these characteristics are a direct result of the shorter repayment terms (again, usually under a year) that short-term finance is defined by.

Moreover, because of these short repayment terms, this type of financing is usually used for working capital, purchasing inventory, covering cash flow issues, and other similar purposes.

All of this being said, if you’re looking for short-term financing because you want access to fast cash, or because you can’t qualify for long-term financing, it’s important to remember that the only guaranteed feature of short-term finance will be the shorter repayment terms.

    Short-Term vs. Long-Term Finance

    Before we dive into more details regarding short-term finance, let’s take a minute to compare short-term and long-term financing.

    With our definition from above in mind, short-term finance differs from long-term finance in a few key ways:

    • Repayment terms: Perhaps the most obvious difference between the two types of financing, long-term financing has longer repayment terms. Whereas short-term finance usually refers to any product with repayment terms of a year or less, long-term finance can refer to a loan with repayment terms of more than a year and even as long as 10 or 15 years.
    • Purposes: Short-term finance is typically used for working capital and other immediate needs. Long-term finance, on the other hand, is often used for bigger purchases and projects, such as renovations, real estate purchases, buying a business, etc.
    • Cost: Although the true difference between these financing types lies in repayment terms, it is worth mentioning that short-term financing is generally the more expensive type, whereas long-term financing is more affordable. Long-term finance, however, can mean a greater amount of interest payments due to the longer repayment terms.
    • Payment schedule: Short-term finance products will typically require weekly or daily payments. Long-term financing, on the other hand, will be more likely to have monthly payments.
    • Application process and funding time: On the whole, short-term finance will mean more lenient requirements, a simpler application process, and faster funding times. This means that long-term financing has greater eligibility requirements, a more involved application process, and longer funding times.

Short-Term Finance: Should You Consider It for Your Business?

Now that we have a better sense of what short-term finance is and how it compares to long-term finance, you may be wondering: Why would I consider short-term finance for my business?

Ultimately, although there are many benefits to long-term finance, there are just as many advantages of short-term finance and plenty of situations in which this product may be the best option for you.

To explain, overall, the short payoff terms associated with short-term financing make these products much easier to secure than traditional, longer-term business loans. Plus, small business lenders are more willing to lend to riskier borrowers over shorter periods of time—which is particularly notable if you’re a startup or a business owner with less-than-ideal personal credit.

Generally, it’s riskier for lenders to loan money over a long period of time as it’s harder to forecast economic trends five, 10, or even 20 years in the future. Along these lines, it’s particularly risky for banks or other lenders to offer loans to small businesses, as many won’t stay in business for longer than five years.

Therefore, not only is it easier to qualify for short-term finance products, but lenders will also be more likely to offer these solutions as opposed to longer-term alternatives. This being said then, whether you’re a less-qualified borrower who needs access to funding or a highly qualified borrower searching for the best rates, it’s much more likely you’ll be able to receive short-term financing than long-term financing.

So, short-term financing is more accessible, easier to qualify for, and there are a variety of types for you to consider, as well as different lenders you can work with. Let’s discuss further.

Types of Short-Term Financing

On the whole, one of the reasons it’s worth considering short-term financing is because this category of finance encompasses a variety of different types of small business funding—making it very likely that you’ll be able to find a type of short-term finance that can fulfill your needs.

Generally, the four main sources of short-term finance are:

  • Merchant cash advances
  • Short-term loans
  • Business lines of credit
  • Invoice financing

Merchant Cash Advances

First up, merchant cash advances (MCAs) are one of the types of short-term finance that are available for small businesses.

Merchant cash advances are structured as a lump sum that is repaid directly through your credit and debit card sales. The financing company will take the portion of your sales (usually on a daily basis), plus their fee. Depending on your business, the terms of a merchant cash advance can range from four months to as long as 18 months.

The fees for merchant cash advances are normally calculated as factor rates and can range from 1.14 to 1.48—adding up to extremely high APRs. As an example, if your business borrows $100,000 in the form of a merchant cash advance with a factor rate of 1.18, you’ll end up paying back $118,000 in total. This means that your merchant cash advance will ultimately cost you $18,000 that you’ll have to pay off on a daily basis.

This being said, merchant cash advances are perhaps the easiest type of short-term finance to secure and quickest to fund. Overall, you should be able to qualify for a merchant cash advance even with poor credit (550 or under) and even with only a few months in business. Because of the way a merchant cash advance is structured, it will be important, however, that you can prove a sufficient amount of daily debit and credit card sales.

Merchant cash advances are offered by online financing companies and usually have simple applications and can fund as quickly as the same day. As we mentioned, you’ll be required to pay back a merchant cash advance on a daily basis; however, because repayments will be dependent on your business’s credit card transactions, your loan will be repaid at the pace of your business—when you have a busy day, you’ll pay more toward your advance, but when you have a slower day, you’ll pay less.

With all of this in mind, it’s important to note that merchant cash advances are often the most expensive type of business financing, and therefore, we’d encourage you to explore all of your other short-term finance options before considering a merchant cash advance. Nevertheless, this product can provide quick funding to less-qualified borrowers who might not have alternatives to choose from.

Short-Term Loans

Short-term loans, on the other hand, will likely be less expensive than any merchant cash advance.

Short-term loans function very similarly to traditional business term loans: You’ll receive a lump sum of capital from your lender at the beginning of your loan, and you’ll pay off that lump sum, plus interest, with regularly scheduled payments.

This being said, however, the “short” in short-term loans still applies. You’ll need to pay back this loan in three to 18 months, depending on the amount and the lender. These loans can fund in as little as one day and often require a personal credit score of 600, at least one year in business, and substantial annual revenue.

Interest rates for short-term loans start at around 10%, but can be higher depending on your qualifications. Compared to longer-term loans, this short-term finance product will require frequent payments (daily or weekly) and will be more expensive.

Short-term loans are available from a variety of online, alternative lenders and will have fairly reasonable requirements. You’ll likely be able to apply for a short-term loan quickly and easily online and receive funds within a few days.

Plus, although a short-term loan will be more expensive than a traditional bank loan for your business, the cost will be much more affordable compared to a merchant cash advance. Therefore, this type of short-term finance is a great option for business owners who need quick and easy access to working capital, especially if they can’t qualify for other financing products.

Business Lines of Credit

Next, business lines of credit are probably one of the most flexible and affordable types of short-term financing you’ll find.

Business lines of credit work very similarly to business credit cards. When you qualify for a business line of credit, you’ll gain access to a line of credit from which you can pull working capital. You’ll only have to pay back the money you spend, plus interest. Then, once you’ve paid back what you’ve borrowed, most lines of credit will reset to your original limit, just like a credit card.

Generally, lines of credit will have lower APRs than credit cards—making them a great resource to have in your back pocket in case of an emergency or an unexpected opportunity.

Business lines of credit can have terms from six months to five years, but short-term lines of credit will typically have terms of anywhere from a few months to one year. Interest rates on this type of short-term finance can start at 7% and go up to 25%.

Additionally, business lines of credit can often fund in as little as one business day. Moreover, you’ll usually be able to qualify for this product with average credit or better and at least a few months in business.

Although many banks offer business lines of credit, you’ll likely find the most accessible short-term lines of credit from online, alternative lenders. These lenders will allow you to complete your application quickly and easily online—and often can approve you and transfer funds within a few days.

Therefore, if you need a quick, easy short-term finance option for your business that won’t break the bank, then a business line of credit may be the perfect choice for you. Plus, having this product in your back pocket to prepare for future funding needs is a smart move for any small business owner.

Invoice Financing

Finally, if you’re a B2B business that sends customers invoices, you’ll want to learn about invoice financing. For a small price in the form of interest, invoice financing will provide you with an advance for outstanding invoice payments that your business is waiting for customers to pay.

Because the outstanding invoices act as a form of collateral for this type of short-term financing, you’ll often be able to secure an advance affordably and quickly. Most invoice financing comes with a fee of about 3% plus 1% for every week that the invoice is outstanding.

In this way, if your customer pays off their invoice quickly, within a week or two, invoice financing could be a remarkably affordable short-term finance solution.

This being said, the advance you receive from a lender can cover anywhere from 50% to 90% of your outstanding invoices, and when your customers pay their invoices, you’ll receive the remaining percentage of the invoice amounts, minus the interest that you’ve incurred.

Moreover, because the invoices serve as collateral, this form of short-term finance is much easier to get, even if you have less-than-ideal personal credit. In many cases, a lender will evaluate your customers’ repayment habits much more strongly than your credit score or time in business.

Additionally, like many of the other types of short-term finance products we’ve discussed, invoice financing can fund in as little as one business day, making it yet another great option for business owners looking to secure funds quickly.

Once again, a variety of online, alternative lenders offer invoice financing (also called accounts receivable financing) and you’ll be able to apply for this solution quickly and easily online.

Therefore, if you need a short-term finance product to free up your business’s working capital while you wait for customers to make good on outstanding invoices, then invoice financing will likely be the most affordable solution for you.

Short-Term Finance: The Top 7 Sources

Now that we’ve explained the different types of short-term finance products that are available on the market, let’s explore some of the best places to actually get this kind of financing.

As we’ve mentioned throughout our discussion so far, the main sources of short-term finance solutions will be online, alternative lenders—as these lenders offer more automated application processes, more lenient requirements (compared to banks), and options for business owners who can’t qualify for other types of financing.

With this in mind, let’s take a look at some of the top lenders for short-term finance solutions:

  1. Fundbox
  2. BlueVine
  3. CAN Capital
  4. LoanBuilder, a PayPal Service
  5. The Business Backer
  6. Kabbage
  7. Headway Capital

1. Fundbox

First, Fundbox is a short-term finance lender that offers business lines of credit. You can get a line of credit from Fundbox in amounts ranging from $1,000 to $100,000 with terms of 12 or 24 weeks. Interest rates on Fundbox lines of credit start at 4.66% of the draw amount.

To qualify for a line of credit from Fundbox, you’ll need at least three months in business, a minimum credit score of 500, and a minimum annual revenue of $25,000.

You can apply for a Fundbox line of credit by creating an account online and connecting your business bank account or accounting software. You can receive approval in minutes online and funds as soon as the next day.

With an automated, simple application process and lenient requirements, Fundbox is going to be a worthwhile short-term finance option for a variety of business owners who are looking for a line of credit.

2. BlueVine

BlueVine is a short-term finance source that offers invoice factoring, lines of credit, and term loans.

For their invoice factoring option, you can cover $20,000 to $5 million worth of invoices, with terms of one to 13 weeks and interest rates ranging from 0.3% to 1.7% per week. To qualify for invoice factoring from BlueVine, you’ll need a minimum credit score of 530, at least three months in business, and annual revenue of $100,000.

For lines of credit, BlueVine offers amounts from $5,000 to $250,000, terms of six or 12 months, and interest rates starting at 4.8% and going all the way up to 51%. Qualifications for a BlueVine line of credit are $100,000 in annual revenue, 600+ credit score, and at least six months in business.

Lastly, the BlueVine term loan is a short-term finance product, with terms of 26 or 52 weeks. Amounts for this loan can range from $5,000 to $250,000 and interest rates can start as low as 4.8% and grow as high as 51%. The requirements to qualify for a term loan from BlueVine are the same as for their line of credit product.

You can apply for any of the short-term finance solutions that BlueVine offers through their online application, which should only take minutes to complete. On average, BlueVine funds customers within a few business days.

Like Fundbox, BlueVine is a great option for fast, accessible funding, especially if you can’t qualify for traditional bank financing.

3. CAN Capital

CAN Capital provides short-term finance in the form of short-term loans.

In order to qualify for one of CAN Capital’s short-term loans, you’ll need to have a 550+ credit score if you’ve been in business for six years or more and a 600+ credit score if your business history is shorter. Additionally, you’ll need to make $4,500 a month in revenue along with three months of business history with consistent revenue—although 12 months in business is preferred.

Short-term loans from CAN Capital can range in amounts from $2,500 to $250,000 and interest is charged as a factor rate, starting at 1.15 and going as high as 1.48. Terms for these loans start at three months and actually be as long as 24 months.

As one of the oldest players in the alternative lending space, CAN Capital allows you to apply for their short-term loans online and can provide funding in just a few days. CAN Capital can also evaluate your application to see if you qualify for their medium-term loan product as well.

Generally, CAN Capital can offer some of the lowest rates for short-term loans, as well as fast funding, and a level of experience and trust.

4. LoanBuilder, a PayPal Service

For another short-term finance source for short-term loans, you might consider LoanBuilder from PayPal.

This unique type of short-term loan is repaid with automatic weekly payments. Amounts can range from $5,000 to $500,000 with terms from 13 to 52 weeks and APRs as low as 24.9%.

Compared to other short-term finance sources, a loan from LoanBuilder will require greater qualifications—you’ll need at least a 600 personal credit score, nine months in business, and a minimum of $42,000 in annual revenue.

This being said, however, if you apply online and qualify for a loan from LoanBuilder, you can receive funds as soon as the next business day.

Therefore, LoanBuilder will be a great choice for quick business loans, especially if you have significant qualifications but can’t qualify for a bank loan.

5. The Business Backer

The Business Backer provides three different types of short-term finance products: lines of credit (through their sister company Headway Capital), merchant cash advances, and short-term loans.

First, for their line of credit product, amounts range from $5,000 to $100,000 with terms starting at 12 months. The interest rate for this financing solution can range from 0.11% to 0.22% in daily interest.

Next, for their short-term loan, Business Backer offers terms ranging from four to 18 months, with amounts of $5,000 to $200,000 and interest rates starting at a 1.2 factor rate. Last, a merchant cash advance from the Business Backer will have the same amounts and terms as their short-term loan, but interest rates will start at a factor rate of 1.19.

To qualify for any of these short-term finance solutions, you’ll need at least $250,000 in annual revenue, a minimum credit score of 600, and a minimum of one year in business. You can apply for any of these products from the Business Backer online and if you move quickly after receiving a prequalification offer, you can access funding in as little as one day.

Compared to other short-term lenders, it may be more difficult to qualify for financing from the Business Backer. This being said, however, if you can qualify, the Business Backer is known for transparency with their terms and fees, as well as offering incentives if you can pay back what you’ve borrowed early.

6. Kabbage

Next, the short-term finance lender Kabbage funds small businesses quickly through their line of credit.

With loan terms from six to 12 months (as well as 18 months) and interest rates from 1.5% to 10% per month, Kabbage’s line of credit is a particularly affordable short-term finance source. Kabbage offers lines of credit ranging from $2,000 to $250,000.

Not to mention, the requirements to qualify for this business line of credit product are extremely flexible—there is no personal credit score minimum, one year of business history, and annual revenue of at least $50,000 (or $4,200 per month for the last three months).

This being said, to apply for a line of credit from Kabbage, you can fill out a simple online application and then connect your relevant accounts—bank account, PayPal, Amazon, QuickBooks, etc. Kabbage will use these accounts to underwrite your application. With this unique process, you can receive approval in a few minutes and see what credit line you qualify for. On the other hand, if Kabbage has trouble connecting to your accounts or verifying your information, the process may take longer.

Generally, Kabbage funds their customers in one to three days. Plus, another benefit of this short-term finance lender is that you repay what you borrow in automatic monthly payments, which isn’t very common for short-term financing. Therefore, a line of credit from Kabbage is a great option if you’re looking for a fast, flexible, and accessible solution to get working capital for your business, especially if you can’t qualify for other products.

7. Headway Capital

Last but not least, Headway Capital provides short-term finance in the form of revolving lines of credit. With terms of 12 to 24 months and amounts as high as $100,000, this line of credit is perfect for business owners who need quick yet sustained access to working capital within one to two business days.

Plus, this line of credit comes with exceptionally easy-to-fulfill minimum requirements—you’ll just need at least six months of business history, a minimum credit score of 560, and $50,000+ in annual revenue to qualify.

However, with APRs ranging from 40% to 80% and a fee every time you withdraw funds, there’s no doubt that a line of credit from Headway Capital is also going to be one of your more expensive options.

Nevertheless, with a quick and easy online application process and very lenient qualification requirements, Headway Capital might be a short-term finance source worth considering for new businesses or those with poor personal credit.

Short-Term Finance: Pros and Cons

Short-Term Finance: Pros

Now that we’ve looked into all of the details regarding the types of short-term finance and the best lenders to work with to access these products, let’s consider the possible benefits as well as downsides of this type of financing.

At the end of the day, you’ll want to think about both the pros and the cons of short-term financing to decide if it’s right for your business.

With this in mind, here are some benefits to consider:

 

    Quick Capital

    First and foremost, short-term finance offers quick working capital to small businesses. Every small business owner knows it: Opportunity doesn’t wait and emergencies happen.

    In this way, a business loan may not do you any good if you have to wait a week or longer to access the funds.

    Therefore, one of the top reasons to consider short-term finance for your business is how rapidly—sometimes even under a day—you’ll be able to have the funds in your bank account.

    Easier to Qualify For

    Another reason to consider the different short-term financing types for your business?

    Overall, these products are exceptionally easy to qualify for. Most short-term finance sources will require lower personal credit scores and less time in business for you to qualify for funding.

    If you’re traditionally less-qualified—with a low credit score and not much business history under your belt—then you might only be able to fund through short-term finance.

    Even if you have great qualifications, you still might not be able to access bank financing, and therefore, short-term products like the ones we’ve discussed are worthy alternatives. Plus, if you have sufficient qualifications, you’ll likely be able to access the best rates short-term financing has to offer.

    Low Cost of Capital

    Because borrowers repay short-term finance in a quicker repayment term, shorter-term debt will typically accumulate less interest.

    This concept often carries the title “cost of capital”—referring to how much total interest your debt accumulates as you pay it off. Even though short-term finance will often have much higher APRs than longer-term finance, because short-term finance is repaid so quickly, the total interest will end up being less.

Short-Term Finance: Cons

While there are benefits to this funding option, short-term finance solutions also have their downsides.

On the whole, it will be more difficult to pay off than longer-term financing, precisely because you have to pay it off so quickly.

Therefore, let’s explore some of the other disadvantages you’ll want to consider as you try to determine whether short-term financing is right for your business.

    More Expensive

    Put simply, short-term finance solutions are expensive.

    If you want to fund and repay short-term finance quickly, you’ll almost always have to pay for it in higher APRs for your funding. The fast repayment terms and the costlier interest rates will make sure of that—making it more difficult to pay back what you’ve borrowed on time.

    With this in mind, if you’re able to do so, seeking a longer-term financing solution that perhaps might take a little while longer to qualify for will almost certainly be a more affordable option.

    Shorter Payment Terms

    Additionally, shorter payment terms can put undue strain on small businesses. With shorter payment terms, you’ll have to pay down your debt in larger chunks, meaning that your scheduled payments will be in greater amounts.

    Therefore, if you decide to fund with short-term finance, you’ll need to be ready to dedicate a large sum of your business’s cash flow to your scheduled payments.

    More Frequent Scheduled Payments

    Another detrimental effect of the “short” part of short-term finance? Your scheduled repayments are going to be much more frequent than they would be with longer-term options.

    When you repay your short-term financing debt, you’ll more than likely be beholden to weekly or even daily payments. Meanwhile, longer-term finance will almost always come with monthly scheduled payments.

Frequently Asked Questions

The Bottom Line

All in all, what’s the takeaway from all of this information on short-term finance?

At the end of the day, short-term finance solutions will likely be the most accessible—with flexible business loan requirements, simple application processes, and a variety of different types of products and lenders to work with.

However, due to the short repayment terms and quick nature of funding, these solutions will also likely be your most expensive options.

Nevertheless, this isn’t to say that short-term financing isn’t right for your business. Ultimately, it’s up to you to decide what your business needs, what you can qualify for, and what will be the best financial solution for you.

With this in mind, it’s very possible that your business will need access to short-term financing at one time or another—if that’s the case, you’ll want to be sure to compare all of your options; consider factors such as type of product, interest rates, fees, application process, and more; and finally, choose the product that will help your business grow and succeed.

It’s also worth remembering that even though longer-term financing will require higher qualifications and a lengthier process, these products, such as SBA loans, will also be your most affordable options.

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Vice President and Founding Editor at Fundera

Meredith Wood

Meredith Wood is the founding editor of the Fundera Ledger and a vice president at Fundera. She launched the Fundera Ledger in 2014 and has specialized in financial advice for small business owners for almost a decade. Meredith is frequently sought out for her expertise in small business lending. She is a monthly columnist for AllBusiness, and her advice has appeared in the SBA, SCORE, Yahoo, Amex OPEN Forum, Fox Business, American Banker, Small Business Trends, MyCorporation, Small Biz Daily, StartupNation, and more. Email: meredith@fundera.com.
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