A short-term business loan is designed to provide quick funding access for businesses. In many cases, businesses will need urgent funding, such as if machinery or a process is faulty, or if there are issues with cashflow. Short-term business loans can fill these gaps and provide support ranging from a few months to a couple of years. Many ordinary business loans will have a much longer repayment period of 2-5 years.
According to a survey by Money.co.uk, SME bank loans in the UK reached £59.2 billion in 2023, and according to Statista, SMEs make up a third of all business lending in the UK. Short-term business loans are a common choice for SMEs as they often run into more issues, and need solutions quickly.
In this article, we will outline short-term business loans and their benefits and disadvantages.
If you are looking for a loan, but aren’t sure what to go for, then Rise Funding you can get an instant business quote in seconds.
Types of short-term business loan
Short-term business loans can come in many different forms. Here are some of the most common types of short-term business loans.
Unsecured business loans
Unsecured business loans are a type of loan where you are not required to declare any assets as collateral. Instead, lenders will use metrics such as credit score, business performance and history with repayments to assess a borrower’s ability to repay.
Due to the lack of collateral, unsecured business loans have a faster approval process, so they are an ideal choice for a short-term business loan.
Merchant cash advance
A merchant cash advance is a type of funding that is different from a typical loan but allows businesses to get funding almost immediately. A merchant cash advance is based on future credit card sales, and the lender will take a percentage of ongoing credit card sales until the loan is paid off. This style of lending means that merchant cash advances can be ready in just a few days.
Invoice finance
Invoice finance is a type of short-term loan that is based on your outstanding invoices. If you have a bunch of unpaid invoices, then invoice financing will allow you to unlock cashflow – up to 95% of the invoice value. Most forms of cashflow funding could be considered short-term business loans.
As the money is legally due to you, this means that invoice financing is ideal for a short-term business loan, as the lender will be able to have your loan ready in just a few days.
Revolving credit facility
A revolving credit facility is a type of financial product that allows businesses to withdraw credit when required, up to a certain limit. Businesses can borrow, repay and borrow as much as they like up to the approved limit. Essentially, this is like a credit card, but in a much more controlled way.
A revolving credit facility is a great way of getting a short-term loan for your business, and due to the controlled nature of it, it is a cost-effective solution.
Business credit cards
Perhaps one of the quickest short-term business loans available, a business credit card is a way for business owners to access funds quickly and borrow as needed, up to a certain credit limit. However, the interest is likely to make a business credit card one of the more expensive ways to get a short-term business loan.
Why use a short-term business loan?
A short-term business loan has a variety of benefits, especially for small businesses looking to grow.
Short-term business loans are:
- A quick option for any business looking for immediate funding
- Easier to gain approval if you have a higher credit risk
- Loans that put your business in debt for a much shorter time (24 months maximum)
If you are a new business, then a short-term business loan can be a great way to get your business off the ground, to either purchase assets required to start the business or services required to help growth.
You might also be an established business with a sudden cashflow gap, or perhaps have an investment opportunity that requires a large upfront payment of cash.
You could also be suffering from unpaid or delayed invoices, for which a short-term business loan can be a remedy.
How much can you borrow with a short-term business loan?
The amount you can borrow under a short-term business loan all depends on the lender, but it is likely to be from around £1,000, to £30,000 to £50,000.
Some lenders can offer short-term loans of up to £500,000, however, the approval rates are much lower for these loans.
Advantages of a short-term business loan
A short-term business loan can be an excellent option for a business looking for immediate funding. Here are all the benefits that a short-term business loan offers.
Speed
Short-term business loans are much quicker to obtain than longer-term loans. This is because they are generally smaller amounts, and often require no collateral, such as with unsecured business loans.
Higher approval rates
If you have a low credit score or are worried about not being approved, then short-term business loans have a much higher approval rate than regular loans. This is because the loans are for smaller sums, and also have a shorter timespan, so lenders take on less risk.
Shorter repayment terms
Short-term business loans are over and done with much faster than long-term business loans. This means your business will be in debt for a much shorter period of time.
Disadvantages of a short-term business loan
Despite the benefits of a short-term business loan, there are some disadvantages and risks that you should be aware of.
One of the main disadvantages of a short-term business loan is that the interest rates will typically be higher than a regular-term loan.
Higher interest rates
Overall, it is more expensive to take on short-term business loans than longer-term loans.
A lender takes compensation by offering a quicker loan by taking more interest.
The interest rate on a short-term business loan will be at least 7%, all the way up to 50%, depending on the type of loan that you use.
For some loans, it can be even higher. For example, if you are using a merchant cash advance to borrow, then in some cases, your APR will be much higher than 50% – as high as 80% depending on how much you borrow and for how long.
Limited loan amounts
A short-term business loan is normally only available for a smaller amount of money. If you are an SME in the UK, it’s unlikely that any lender will offer you more than £50,000-100,000. This of course depends on your business, your earnings, and your likelihood of repayments.
Additional fees
Short-term business loans typically carry additional fees, such as late repayment fees. There can also be certain fees if you pay off the loan early. Make sure you are aware of all the additional fees before you take on a short-term loan.
Can you get a short-term business loan with bad credit?
Yes, it is possible to get a short-term business loan with bad credit, and often these loans are easier to obtain than long-term business loans.
However, there may be some limitations to your loan if your credit is particularly bad, such as being offered a smaller amount, a shorter repayment period, and/or higher interest rates.
Conclusion
Short-term business loans can be an excellent way to boost your business and plug any gaps in your cashflow.
Although short-term business loans are some of the easiest loans to obtain, it’s important to remember that they have some disadvantages, such as having higher interest and smaller loan amounts.
If you’re looking for a loan for your business, then you can fill out the form below, which will help you find the exact type of funding you need.
