Pros And Cons Of Short-Term Business Loans

Key takeaways

Short-term business loans offer fast, flexible financing that typically come with less stringent qualification requirements than traditional loans and may help you save on interest.
The downsides to short-term business loans include smaller loan amounts, shorter repayment terms, frequent payments and higher costs.
Short-term business loans are best used to bridge gaps in cash flow, not to finance large, longer term purchases.

Short-term business loans — typically business loans with terms of 24 months or less — can be funded quickly, may have less stringent qualification requirements and offer easy, fast applications. However, they’re not right for every business. Weighing the pros and cons of short-term business loans can help you decide if one is right for you.

Pros of short-term business loans

Short-term business loans tend to have easier eligibility requirements, helping you qualify without a long time in business or high revenue.

Fast funding

One of the biggest perks of these loans is how quickly the funds can hit your bank account. Many fast short-term loans from online lenders can be funded in as little as 24 hours. Accessing fast capital can be crucial in the event of an emergency, or it can help you capitalize on an unexpected opportunity.

Interest savings

Though it’s typically not the reason for getting a short-term loan, shorter loan terms can end up saving you in total loan cost because you’re paying off the loan faster, and are therefore paying less in interest.

Easy application

Short-term business loans, especially those offered by online lenders, offer an easy application process that can be completed with minimal paperwork, usually entirely online.

Relaxed eligibility requirements

Traditional lending institutions usually require at least two years in business with consistent revenue to issue a loan. On the other hand, online lenders that offer short-term small business loans have looser requirements. You can often qualify if you’ve been in business for a year and bring in at least $100,000 in revenue. You might also be able to qualify with a less-than-stellar credit score. Bad credit business lenders often offer business loans with short repayment terms, ensuring that they will get repaid when lending to high-risk borrowers.

This is particularly true with higher-risk short-term options, like merchant cash advances and invoice financing.

Be advised that to compensate for the looser eligibility requirements, some lenders charge factor rates rather than interest. Make sure you convert factor rates to interest rates to help you accurately compare business loan costs.

Cons of short-term business loans

Before you decide on a short-term business loan, consider that short-term loans may come with smaller maximum loan amounts than you need, along with a few other downsides.

Smaller loan amounts

Because online lenders don’t dig as extensively into your company’s financing before offering these loans, they generally cap how much they offer. While you find long-term business loans in the millions of dollars, short-term business loans from online lenders may have loan limits of $250,000 to $500,000.

Even if the amount you need is under that limit, keep in mind that any loan fees that come with short-term business loans can eat into the money your business gets.

Short repayment terms

Online lenders offer fast access to funds, but these loans typically have rigid repayment periods between six and 24 months. If you think your business won’t be in a significantly better financial position by the end of the loan term, it might not make sense to take out a loan you’ll need to repay so quickly — especially when you consider just how much interest can accrue during that time thanks to high short-term business loan interest rates.

Frequent payments

Depending on the type of short-term loan and the lender, you may have to make payments more frequently than long-term loans. Some online lenders require daily or weekly repayments on short-term loans like lines of credit, working capital loans or merchant cash advances.

Aggressive repayment schedules can be hard to manage and could make it easier for you to default on a loan or need another loan to help cover costs.

Higher costs

Short-term loans tend to come with high interest rates. While people with good-to-excellent credit may be able to secure loans with interest rates between 7.5 percent and 14 percent, business owners with fair or bad credit won’t be so lucky. Depending on your creditworthiness and the type of short-term loan, interest rates for subprime borrowers can be between 30 percent and 90 percent — or higher.

Fees can also be an expensive problem. Common fees include origination and underwriting fees, but lenders may add additional costs such as processing and wire transfer fees. There may also be penalty fees to deal with, such as late fees if you miss your payment due date or prepayment fees if you try to pay certain loans off early.

Business credit cards

Business credit cards are another type of short-term business financing that can be more affordable than business loans. With credit cards, you can avoid interest charges if you keep your balance paid off each month. This also makes them a cost-effective way to build credit.

Potential to fall into a bad cycle of debt

Short-term small business loans mean repaying what you borrowed quickly — and at a relatively high cost. Business owners may get tempted to apply for another short-term loan if they can’t keep up. The application process is easy, and the money hits their account quickly, so it might seem like a good option to avoid defaulting on the initial loan.

But this can lead to an ever-growing debt cycle, damaging your company’s short-term cash flow and long-term outlook. This can get particularly challenging since regularly taking on new debt can damage your credit score, making it harder for you to qualify for anything except certain types of bad credit business loans as you move forward. You should only take out short-term business loans if you know your business will have the cash flow needed to repay the loan on schedule.

How to determine if a short-term business loan is right for you

There are certain situations in which it can be a good idea to consider a short-term business loan:

You need funding immediately to cover cash flow gaps.
You want to capitalize on a new business opportunity.
You can manage the short repayment timeline and higher payments.
You can’t qualify for a longer-term business loan.
You need relaxed eligibility requirements because you don’t have the best credit or strong revenue, but your business has strong cash flow.

Use a business loan calculator to estimate repayments and ensure you can comfortably manage repayments for your short-term business loan.

Bottom line

The best short-term business loans are a good option to help you cover emergencies or cash shortfalls, but they can be expensive, especially if you can’t repay the loan quickly. Make sure this is the right type of financing for you before applying.

Frequently asked questions

Short-term business loans can help businesses that need an influx of capital right away. Depending on the lender, you may be able to qualify for a loan with minimal paperwork and if you have bad credit or are a startup. They may have higher interest rates compared to long-term loans.
Yes, some online lenders offer short-term loans for startup businesses. You may need to meet a minimum time in business requirement of six months. If you can wait up to 90 days for funding the SBA provides business loans to startups. This includes SBA 7(a) loans, microloans and Community Advantage Lending Companies.
Short-term business loans typically have a repayment period of six to 24 months.