Everything You Need to Know About Short-Term Lines of Credit

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What Is a Short-Term Line of Credit?

A short-term line of credit is a business line of credit with a loan term between six months and one year. With a short-term line of credit, you can draw from a pool of funds whenever you need capital. Once you pay back what you took out, plus interest, you can dip into the full amount of the credit line once more.

A business line of credit is among the most flexible options when it comes to your business loan options. A short-term line of credit, in particular, can provide your business with a quick capital injection to cover unforeseen expenses or capitalize on a new business opportunity.

This can be an ideal financing solution for small businesses that have to contend with fluctuating cash flows and that might not have a lot of collateral to offer up. In this guide, we’re going to tell you everything you need to know about short-term business lines of credit so you can determine if this is the right solution for your business’s cash flow needs.

In this guide, we’ll cover the following:

Short-Term Line of Credit Overview

A short-term line of credit is a business line of credit with an average loan term between six months and one year. Of course, this begs the question, “what’s a business line of credit?”

business line of credit provides a business owner access to a pool of funds from which they can draw from whenever they need capital. Unlike a term loan, you can draw from your credit line on an as-needed basis, and you’ll only repay what you use, plus interest. In this way, a business line of credit is like a more powerful business credit card.

Once you repay what you owe, you’ll have access to the full amount of credit once more.

For example, say you’re given access to a $50,000 short-term line of credit. You decide to take out $30,000 and keep the other $20,000 in the pool of available funds. If you do this, you’ll only have to pay back the $30,000, plus interest. Once you do, you’ll again have access to the entire $50,000. No need to apply for another loan to get more financing.

However, while most business lines of credit conform to this “revolving credit” format, some will not automatically renew after you’ve repaid what you owe. Instead, these lenders will require you to reapply.

Some lenders also require you to secure your business line of credit with some form of collateral, like inventory or accounts receivables. Others offer unsecured business lines of credit, requiring only a personal guarantee.

Also keep in mind that short-term lines of credit come with no prepayment penalty. However, some lenders charge draw fees (a cost for drawing funds), inactivity fees (for not using your line of credit for a certain period of time), or withdrawal minimums (where you’re required to draw a specified amount during a particular period of time).

Overall, the appeal of a short-term line of credit is its flexibility. You can dip into it whenever you need some quick capital to cover expenses like payroll or inventory.

Short-Term Line of Credit vs. Traditional Line of Credit

Now that you know what a line of credit is, let’s look at the key differences between a short-term line of credit and a longer-term line of credit so you can see which might make more sense for your business. Generally, short-term lines of credit are:

  • Easier to qualify for: If your business is relatively new and doesn’t have a well-established credit history, or if your personal credit score is less than stellar, getting a traditional line of credit can be tricky. Because of this, businesses will opt for a short-term line of credit to help with cash flow while building up their credit score.
  • Faster to fund: In general, lines of credit fund pretty quickly. But if you’re in a hurry and/or simply don’t like dealing with paperwork, a short-term line of credit can fund even faster than a traditional one.
  • More expensive: Of course, having more lenient requirements and faster funding times comes with a tradeoff. Generally, short-term lines of credit will have a higher cost of debt to compensate for the increased risk the lender is taking on. Essentially, you’re paying a premium for speed and convenience.

Where to Get a Short-Term Line of Credit

You can apply and receive a short-term business line of credit from a bank or from an alternative lender. A short-term line of credit will come with a specified amount of funds on your line, as well as specific repayment terms and interest rates.

Depending on your lender, a short-term line of credit can range from $1,000 to $100,000. Depending on your creditworthiness, your interest rate will fall somewhere between 7% and 25%. If you go through an alternative lender, you can qualify for a short-term line of credit in as little as 24 hours.

How to Qualify for a Short-Term Line of Credit

As you can tell, short-term lines of credit are among the most business-friendly financing options. But what exactly does it take to qualify for one? Here are the requirements for qualifying for a short-term line of credit:

    Personal Credit Score

    To qualify for a short-term line of credit, you’ll need a credit score of at least 500. However, this number differs from lender to lender, and some require a much higher credit score to qualify. What’s more, the higher the credit score, the better your loan terms.

    Annual Revenue

    To qualify for a short-term line of credit, you’ll need at least $25,000 in annual revenue. Again, this number differs from lender to lender. To evaluate your revenue numbers, the lender will likely ask for some financial statements, including your bank statements, balance sheet, and profit and loss statement.

    Time in Business

    Having some business history under your belt shows that you know how to actually operate a business, and are therefore less risky to lend to. A lender offering a short-term line of credit will want to see at least six months of business history on the books. However, there are lenders that specialize in startup business lines of credit for brand-new businesses.

    Collateral

    Like we said, some lenders will want you to offer up collateral to secure your short-term line of credit with. This could be physical assets like real estate or simply a personal guarantee. With a personal guarantee, you’re agreeing, as an individual, to pay back the funds you’ve borrowed in the event that your business cannot do so.

    Some lenders also secure their lines of credit by placing a UCC lien on your business. A UCC lien is a formal statement in which the lender lays claim to your business assets to repay your debt in the case that you default on the loan.

    Generally, with a short-term line of credit, the collateral requirements are minimal.

    Additional Considerations

    There is some additional business information a lender may want to see before granting you a short-term line of credit. This includes a current debt schedule and some basic business information, such as your EIN, a voided business check, entity type, and business licenses or permits.

How to Apply for a Short-Term Line of Credit

The application process for a short-term line of credit is fairly simple. Just follow these steps:

Compare Lenders

The best place to go for a short-term line of credit is an alternative lender, as they will typically have the fastest application process and easiest requirements. We’ll talk more about some specific lenders to consider below.

Prepare Your Application

Applications vary by lender, but you should expect to lay out some of the materials we talked about in the previous section. With an alternative lender, you should be able to submit your application online. Once the lender reviews your application, they’ll reach back out if they need additional information.

Pick the Best Loan Option for You

Ideally, you’ll get multiple lenders competing for your business. If this is the case, here are some things to consider when making your selection:

  • How do you plan to use the funds? Are you using the short-term line of credit to stabilize cash flow? Or are you seeking to invest in an opportunity that may take a while to see returns? What you plan to spend the money on should help inform your decision.
  • How quickly can you repay the funds? This is a short-term line of credit, so if you don’t think you can repay what you owe within the terms, perhaps you need to pick a lender that’s willing to offer a longer term.
  • Do you have strong financials? If you have a good credit score and high annual revenue, you may be better off going with a traditional line of credit, or even a term loan. These are often cheaper and come with longer repayment terms.

The Best Short-Term Line of Credit Lenders

Now that you have all the information you need, here are some lenders to consider if you’re going to pursue a short-term line of credit:

OnDeck

OnDeck offers lines of credit of up to $100,000 with a quick and easy approval process. Just like with a traditional bank line of credit, with an OnDeck line of credit you don’t need to start repaying until you actually draw from the credit line. Afterward, fixed weekly payments automatically get deducted from your business bank account.

There’s also a $20 monthly maintenance fee. However, if you draw $5,000 or more from your credit line within the first five days of opening your account, that fee is waived for six months. There are no fees to draw from your credit line, and you can pay the balance back early with no prepayment penalty.

Here are the qualification requirements:

  • One year of business history
  • $200,000 in gross annual revenue
  • Have a personal credit score of 600 or higher, if you’re the majority business owner

Interest rates typically range from 13.99% to 36% APR and are determined by OnDeck based on your business and personal credit scores, as well as on an assessment of your business’s cash flow.

Kabbage

Kabbage offers lines of credit up to $100,000 and their approval process is even faster and easier than OnDeck’s. There’s no minimum requirement for your personal credit score—just provide some basic business information and give Kabbage access to some of your business accounts, like QuickBooks, Square, or your business checking account, that provide an overview of your cash flow.

Kabbage reviews this data and determines whether you qualify for a six- or 12-month term. (If you want the 12-month term, you’ll need to get a credit line of at least $5,000.) Once approved, you can draw cash as often as once a day, with no repayments until you actually draw money.

Here are the qualification requirements:

  • One year of business history
  • $50,000 in gross annual revenue

Once approved, you’ll pay a fee of between 5% and 12% of your chosen loan amount. Every month, you pay back one-sixth of the total loan (if you have a six-month loan) or one-twelfth of the total loan (if you have a 12-month loan)—plus that monthly fee. You can repay the loan early with no penalties.

Kabbage vs. OnDeck

Which alternative lender offers a better line of credit for your business? That depends on your situation and your needs. Here are the main differences between Kabbage and OnDeck:

  • Fixed monthly payment (Kabbage) vs. fixed weekly payment (OnDeck)
  • $50,000 minimum annual gross revenues (Kabbage) vs. $200,000 minimum (OnDeck)
  • No minimum personal credit score (Kabbage) vs. minimum 600 personal credit score (OnDeck)

If you business has lower revenues or you have a lower credit score, Kabbage might be best for you. Ditto if you prefer making a fixed payment just once per month—like if you own a B2B company that only bills customers monthly and gets paid in “chunks.”

If your business is more established with higher revenues or if your income is more consistent—a retail or restaurant business with a lot of small but steady sales, for example—then you might prefer smaller weekly payments to having one big payment due each month.

Don’t choose your lender based on this alone. No matter what type of financing you’re seeking, always compare the cost of the capital—which includes interest rates, fees, and penalties.

Read more in our complete guide on Kabbage vs. OnDeck.

Is a Short-Term Line of Credit Right for You?

Only you know what type of funding your business needs, but short-term lines of credit certainly have their advantages. They can serve as your rainy day fund, or give you access to quick cash when you need it most. What’s more, they’re among the easiest business financing options to qualify for. If you stay within your borrowing limits and repay your debt on time, a business line of credit can help you accomplish your goals, and then some.

See Your Line of Credit Options

Rieva Lesonsky

Rieva Lesonsky is a contributing writer for Fundera. 

Rieva has over 30 years of experience covering, consulting and speaking to small businesses owners and entrepreneurs. She covers small business trends, employment, and leadership advice for the Fundera Ledger. She’s the CEO of GrowBiz Media, a media company specializing in small business and entrepreneurship. Before GrowBiz Media, Rieva was the editorial director at Entrepreneur Magazine. 

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