WHAT ARE SHORT-TERM LOANS AND HOW DO THEY HELP A SMALL BUSINESS?

Recently updated on January 11th, 2023 at 11:05 am

In this article, we’ll look at short-term business loans – what they are, why you might use them, their various benefits, the loan options available, how they work, and the difference between secured and unsecured loans.

What is a short-term business loan?

As the name suggests, a short-term business loan is a loan taken out for business purposes. When we say ‘short-term,’ we generally mean for a period of time anywhere from two months to two years. Unlike longer-term loans, that are often up to 25 years and traditionally used to purchase commercial or industrial property, or investment in income-producing equipment (such as a factory fit-out), short-term loans are typically used to smooth out business cash flow gaps over a relatively short period of time. Short-term loan amounts are also comparably smaller to long-term loans, and are usually within a range of $25,000 to $500,000+.

Why you might consider a short-term loan for your business

A short-term loan can help smooth out the ups and downs of business cash flow.

Anyone who has run a business of any size understands the difficulties of managing cash flow fluctuations or dealing with cash flow gaps; or the frustration of missed opportunities simply because funds were not available to take advantage of them at the time. This can be particularly difficult for small businesses that are reliant on payments from fewer (larger) debtors, seasonal trade, or lack of ‘buffer’ funds to meet unexpected expenses.

One of the most common uses for a short-term business loan is to manage seasonal fluctuations in trade and cash flow. For example, suppose a business does a greater share of revenue in the summer months (such as a tourism operator) or at Christmas (such as a giftware retailer). In these cases, a short-term business loan can be a handy way to balance cash flow through the leaner months or to purchase stock in the lead-up to a buying period.

How can you use a short-term business loan?

There are many potential uses for a short-term business loan. Here are some common scenarios:

Purchase new stock
Purchase new equipment
Make essential repairs to business equipment
Make wage payments
Hire new staff for an upcoming busy period
Offset slow-paying customers
Pay outstanding tax bills
Fulfil a new contract
Smooth out time lags between accounts receivable and accounts payable
Start a business
Invest in an established business or buy an existing business

The benefits of a short-term loan for a small business

When cash flow is tight, or there is a crunch looming, timing is often of the essence. The key benefits of short-term loans for small businesses are that you can easily apply online, get approved and funded quickly compared to other types of loans. While lenders’ turnaround times vary, short-term business loans can typically be obtained within three to five days, and often without extensive documentation. A short-term business loan is also the perfect solution for a short-term cash flow gap where the funds are not required for more than a few months.

Where can you get a short-term business loan?

You can apply online with a variety of lenders, from the big banks to new and emerging fintechs and private lenders. The good news for businesses, especially for small businesses, is the emergence of specialist short-term lenders, who are making business lending more accessible and competitive than ever before.

What short-term loan options are there for small businesses?

Short-term business loans come in a variety of different forms. The type that is most aligned with your business will depend on your specific circumstances and requirements. Here’s a few areas to consider:

Term loan: A single lump sum to be repaid over an agreed period of time with a variable or fixed interest rate.
Business overdraft: A pre-approved facility attached to your business bank account that you can draw down from time to time as required.
Line of credit: Similar to an overdraft, but not attached to a specific bank account.
Business credit cards: For smaller amounts, these are convenient but attract a very high rate of interest if balances are not paid in full each month.
Equipment or vehicle leases: Funds for the purchase of specific equipment or vehicles, paid in monthly installments (often with a lump sum payment at the end of the lease term).
Invoice financing: Also known as debtor finance or invoice discounting, current invoices are paid to the business by the lender, less an agreed percentage fee, with the lender collecting the full invoice payment from customers.

Short-term business loan facts

Short-term business loan facts and figures depend entirely on the lender. Here’s a product overview from specialist short-term business loan provider, Mango Credit:

Loan amounts can be $25,000 to $500,000+
Loan terms from two months to two years+
Funding typically within three to five days from application
No credit check or income assessment
Minimal documentation
Security can be provided by real estate assets
Secured by caveat, second or first mortgage
Flexible underwriting

The difference between secured and unsecured business loans

One key factor when applying for a short-term business loan will be whether the loan is secured, or unsecured.

A secured loan requires security – typically in the form of relatively liquid assets that a lender can sell to recover the loan funds in the event of a payment default. Think property, inventory, accounts receivable, vehicles and equipment and any other type of asset the business owns (note that a loan may also be secured against the personal assets of a business owner, such as a home).

Secured loans generally take longer to approve as the security needs to be considered and valued, requiring valuations and further documentation. A couple of key benefits of a secured loan are that they commonly allow larger amounts to be borrowed and charge lower interest rates based on the lower risk.

Unsecured loans differ in a few key ways. Rather than physical assets as security, the loan may be approved on the basis of your strong business cash flows that demonstrate a robust capacity to pay down the loan and interest. Generally, they will be for smaller amounts than secured loans and they attract a higher rate of interest as they are riskier loans for lenders. But unsecured loans do offer the benefit of faster approval as they require less upfront information and documentation.

What short-term business loan is right for you?

The most aligned loan for your business will depend on entirely on your specific situation and circumstances. Questions to ask yourself and discuss with your lender include:

What the loan is for
How much you need to borrow
How long you need the funds (or how soon you can pay back the loan)
What repayment amount can you afford
What you have to offer as security
What happens if you’d like to pay out the loan early
What happens if you’re late with payment(s)

Key takeaways

If you are facing a cash flow shortfall in your business, or need funds to grow your business or make an investment, a short-term business loan can be used for a variety of purposes. You can apply online for short-term loans from a variety of lenders, with private lenders and fintechs offering a relatively simple application process, minimal documentation and fast funding.

Mango Credit

Yanis Derums is the Founder and Director of Mango Credit– a leading private lender specialising in bridging loans for personal use and business short term loans for commercial and/ or investment purposes. Yanis has extensive experience with financial analysis, credit assessment, product structuring, and general business management