Term Loan Deep Dive: Short-Term vs. Traditional Term vs. SBA Loan
Short-term loans are designed to meet short-term financing needs. They can be a flexible financial tool to better manage cash flow, deal with unexpected needs for extra cash, or take advantage of an unforeseen business opportunity.
$2,500 - $250,000
3 - 18 months
Starting at 10%
As little as 1 day
Hereâs the low-down on qualifying:
Short-term lenders emphasize cash-flow more than lenders of traditional term loans. Strong cash-flow can sometimes overcome other financial information that would disqualify a business for a traditional term loan.
But you should also know that the interest rate youâll pay and the amount you can borrow will depend on your annual revenue, business history, and personal credit rating.
**Based on past Fundera customers.
Sometimes your business just needs extra cashâright away.
But can you actually get financing that fast?
Fundera helps businesses get funding in all shapes and sizesâ¦ Including loans that make it to your bank account before you know it.
Letâs take a closer look at how these smaller short-term loans can make a big difference.
Anyone who runs a small business knows: it takes money to make money.
That makes access to working capital essentialâwhether youâre just starting out or have big plans to expand your existing business.
In fact, just about every business needs extra working capital from time to time. When thatâs the case, a short-term loan might be the best option.
What if you have the opportunity to fill a massive order for a customer who can pay you in 60 days, but your supplier needs to be paid in a week?
Without access to cash, you might have to pass up that golden opportunity.
But with a short-term loan, you could get the funding you need to fill that orderâand then pay your loan back when your customer pays you.
Or maybe you have a seasonal small business that needs an influx of capital just before the holiday season.
Getting a short-term loan would give you the funding to cover promotional expenses and build your inventory well before the holidaysâeven though you might be short on cash right now.
Other businesses find that a short-term loan is a great way to fund business expansion, refinance other short-term debts at more favorable terms, pay upcoming taxes, put extra cash into their business to take advantage of new opportunities, or meet pretty much any short-term financing need.
The big point?
Fast financing gives you the flexibility to spend how you need.
Short-term loans work like traditional term loans: predictability is the name of the game.
Overall, itâs a straightforward loan product.
You receive a set amount of cash upfront that you agree to pay back, along with the lenderâs fees and interest, over a predetermined period of time.
But with short-term loans, loan amounts may be smaller, the repayment period drastically shorter, interest rates higher, and you often pay the lender back on a daily or weekly instead of monthly schedule.
On the flip side, theyâre usually easier to qualify for, faster to apply for, and quicker to fund.
One thing to keep in mind, though: short-term loans are some of the most expensive loans available to small businesses.
Although they make sense for plenty of situations, the best loan for your business is always the lowest-cost loan. Do your research, apply for a few different loan types, and if it comes down to it, make sure your business has a clear plan on how it will pay back short-term debt.
Short-term loans are paid off quickly, most often with daily payments.
On the one hand, you donât have to worry about that debt for too long.
But on the other, repaying a short-term loan in daily or weekly installments could cut into your cash flow.
Short-term loans also often come with factor rates instead of interest rates: a factor rate is a number that, when multiplied by your total loan amount, gives you how much youâll be paying the lender back.
A bit confused?
Donât worryâletâs explain with an example.
Say youâve taken out a $100,000 short-term loan and the lender has a 1.18 factor rate.
1.18 multiplied by $100,000 is the total amount youâll need to pay back: $118,000.
Then weâll assume your lender will want you to pay back the total amount in 12 months, like with most short-term loans.
Given that there are 22 payment days in a month, thatâs 264 payments youâd have to make.
And how much are shelling out every day for this loan?
The amount of each of those payments would be $446.96, making your actual APR 33.54%âquite a bit higher than the rates for traditional term loans.
Short-term loans come with higher price tagsâ¦
Simply put, youâre paying the price for speed and convenience: fast cash is expensive cash.
Higher rates and shorter terms are able to generally offer reduced paperwork and faster funding times than traditional term loans.
But expensive debt can be better than no debt if your business needs the money to take advantage of an opportunity... Assuming you know you can afford to pay it back. Just because theyâre pricey, short-term loans donât need to be a bad investment.
In fact, sometimes a short-term loan is exactly what your business needs to grow.
Plus, short-term loans can also be refinanced into longer-term products down the road if your businessâs financials improve.