Fully understanding what short term loans are can be of the utmost importance when you find yourself in need of quick financial assistance. Simply put, a short-term loan is money you can borrow for a short period, usually with the expectation to pay it back within a year. It can be a fast solution to cash flow problems, whether you are an individual facing unexpected expenses or a business navigating financial hurdles.
Perhaps your business is experiencing a dip in cash flow. A short-term business loan might be the answer, especially since it doesn’t usually require a lot of collateral compared to other small business funding options. However, it’s important to be aware that these loans often come with high-interest rates and substantial fees. Additionally, short-term lenders typically offer smaller amounts compared to larger banks.
What is a Short-term Loan?
A short-term loan is a type of financing that is typically repaid within a short period of time. These loans differ from long-term loans in various ways, including the repayment schedule, interest rates, and qualification criteria. Keep in mind most of these lenders want you to pass a minimum credit score, especially in the case of larger short-term loans.
Below, we explore deeper the characteristics and requirements of short-term loans:
- Shorter Repayment Period: Short-term loans can manifest in several forms, including installment loans, lines of credit, or invoice factoring. While repayment periods are commonly 12 months or less, they have the potential to span up to three years, depending upon the specific agreement with the lender (Investopedia).
- Short Term Loan Essentials: Short-term loans are typically unsecured, requiring repayment within a year, often in just a few weeks or months. Generally, lenders ask for proof of employment, a bank account, and some form of ID. Collect this information before you apply for these short-term loans.
- Interest Rates and Fees: Due to the lower credit requirements and lack of collateral, these loans tend to have high-interest rates, potentially reaching up to 400%, along with additional fees and penalties. (Bankrate).
- Loan Amounts: Generally, these loans are offered in smaller amounts compared to long-term loans. The amount lent is often determined by the borrower’s creditworthiness and the lender’s policies, but it’s important to weigh your options for the best deal (NerdWallet).
- Flexible Use: Despite the higher costs, these loans offer flexibility as they can be used for a variety of purposes, including emergency expenses, business cash flow issues, or to take advantage of timely opportunities (Bankrate).
Can you Take a Short-term Business Loan?
Short-term business loans are excellent for cash flow gaps and buying inventory. This type of short-term financing requires good documentation.
Benefits of Short-Term Small Business Loans
Entrepreneurs can use these short-term business loans to their advantage. Remember, these are different from lines of credit options. There are different loan terms involved. Here are five advantages this type of small business loan has over other lenders.
Business Owners Get Quick Funding
Get a loan early with this type of financing. Short-term business loans like this get approved quickly. In some cases, small business owners can have the money in a day or two.
You Can Apply Quickly
The process is fast and easy. In many cases, you’ll be dealing with online lenders. Collect documents to make the process even quicker than with traditional lenders. Putting together a credit history and annual revenue numbers makes the process even faster. Don’t forget bank account numbers.
You Can Build Credit Scores
Qualifying for one of these loans can help you get a line of credit or a long-term product down the road. Maybe you’re a new business with a low credit score. Small businesses generally and startup businesses specifically can use short-term loans. Remember, brand-new businesses might not meet a minimum credit score requirement for longer loans.
These Bring In Cash
It takes just a few minutes to apply. And the fast application process can help with cash flow issues. Traditional banks offer business line of credit products and lines of credit. But unpaid invoices can cause emergency expense problems when mortgages and utilities need to be paid. There are same-day funding possibilities but you need to be careful with them. There’s no financial protection with these.
These Are Flexible
These loans have varying repayment options, interest rates, and repayment terms. A longer-term loan might have a lower interest rate, but they have longer repayment periods.
Here’s another bonus. You can make monthly payments on these loans. Even though they are short-term, you don’t need to pay it all back in a lump sum. Weekly payments can be helpful so you can shift the balance of the remaining interest toward the principal.
Types of short-term loans
You might need one of these loans for unexpected costs or an unforeseen business opportunity. Several types include lines of credit, installment loans, bank overdrafts and invoice factoring. There are also car title loans and payday loans, but they are generally considered less favorable due to their high interest rates and potential for leading borrowers into a cycle of debt.
Note that there can be credit score penalties for taking out a short-term loan. Some companies can make an inquiry, so your credit will take a slight dent. Your credit score can also be hit if you don’t pay the loan off in time or miss payments.
Practical Steps to Take Before Applying for a Short-Term Loan
Before diving into the application process for a short-term loan, it’s crucial to take several preparatory steps:
- Assess Your Financial Situation: Carefully evaluate your current financial situation and the specific reason you need a short-term loan. This will help you determine the amount you need to borrow and ensure that you can manage the repayment plan.
- Research Lenders: Not all lenders offer the same terms for short-term loans. Spend time researching and comparing different lenders, including online lenders, banks, and credit unions, to find the best rates and terms.
- Understand the Terms and Conditions: Before applying, make sure you fully understand the loan’s terms and conditions, including interest rates, fees, repayment schedule, and any penalties for late or early payments.
- Prepare Your Documents: Gathering all necessary documentation beforehand can expedite the application process. This typically includes proof of income, bank statements, identification, and any business-related documents if you’re applying for a business loan.
- Consider the Impact on Your Credit Score: Remember that applying for a loan may affect your credit score. Some lenders perform a hard credit check, which can temporarily lower your score. Additionally, ensure you can meet the repayment terms to avoid negative impacts on your credit history.
The Importance of Strategic Planning with Short-Term Loans
Utilizing a short-term loan requires strategic financial planning to avoid potential pitfalls:
- Budgeting for Repayment: Before accepting a short-term loan, create a detailed budget that accounts for the loan repayment within the specified timeframe. This may involve adjusting other expenses to ensure timely repayment.
- Purpose and Use: Clearly define the purpose of the loan and plan how you will use the funds. Whether it’s for covering unexpected expenses, bridging a cash flow gap, or taking advantage of a business opportunity, having a clear plan can maximize the loan’s benefits.
- Emergency Fund: If possible, establish or maintain an emergency fund to avoid relying on short-term loans for future unforeseen expenses. This fund can provide a financial buffer, reducing the need for high-cost borrowing.
Choosing the Best Short-Term Loan Option
When selecting a short-term loan, consider factors beyond just the immediate need for cash:
- Fixed-Rate Loans: Fixed-rate loans can offer predictability in repayments, an important factor when budgeting for loan repayment.
- Lender Reputation: Opt for reputable lenders with transparent lending practices to avoid hidden fees and unfair terms.
- Prepayment Flexibility: Look for loans that allow early repayment without penalties, as this can save you money on interest if you’re able to pay off the loan ahead of schedule.
- Financial Advice: Consider consulting with a financial advisor or a credit counselor to explore the most appropriate short-term loan options for your situation and to discuss strategies for managing debt.
Best Short-Term Loan Options
As a small business, you might face a cash flow gap or encounter other financial issues. Here, we’ve curated a list of the best options for short-term financing. Here’s a quick list of your best choices when you’re in North Dakota. And a list if you live in South Dakota. Remember to evaluate how many business days it will take to access the funds as you explore these options:
1. OnDeck
You can get same-day funding here. Interest rates depend on your monthly or annual revenue. Be aware you can’t get bad credit loans with this option.
2. SnapCap
This company has a low minimum credit score requirement. You can try and select the loan amount with their flexible funding options. They have supplied over $1 billion in total business credit funding.
3. Credibility Capital
Get a low fixed monthly payment. There is even a loan calculator so you can check out several repayment period options.
4. Fundbox
Repayment terms range here, and you can get Fundbox Flex Pay. This allows you three extra days to repay. Add this addition to the original loan agreement, and there are no fees.
5. Avant
This company has been offering installment loan options since 2012. They offer a variety of products, including home improvement and or emergency loans, to name a few.
6. LendingPoint
If your credit report needs a little work, this is the company to work with. Businesses and individuals with a poor payment history and bruised credit can apply for a loan amount anywhere between $2000 to $36,500. The APR is between 7.99% all the way up to 35.99%. This is a preferred choice for bad credit borrowers.
7. PenFed Credit Union
You don’t need to pay any origination fee. Plus there are no prepayment penalty fees.
8. Upstart
This is a good choice for people with fair credit. Borrowers can get the money the next day after they are approved. Upstart uses AI to approve their borrowers.
9. Upgrade
There is a minimum credit score of 560. However, there is no early repayment penalty. Upgrade offers a low borrowing limit of $1,000.
Before applying for a short-term loan, reviewing all terms and conditions thoroughly to make an informed decision is recommended. It’s also beneficial to consider various lenders to find the best fit for your financial situation.
Comparison of Top Short-Term Loan Providers
Here, we have outlined some of the best short-term loan options in a table to quickly help you find a solution that meets your business’s unique needs.
| Lender | Key Features |
|---|---|
| OnDeck | Same-day funding - Interest rates based on monthly or annual revenue - No bad credit loans |
| SnapCap | Low minimum credit score requirement - Flexible funding options - Over $1 billion in business credit funding |
| Credibility Capital | Low fixed monthly payment - Loan calculator for various repayment periods |
| Fundbox | Flexible repayment terms - Fundbox Flex Pay for extended repayment time - No additional fees |
| Avant | Offers installment loans since 2012 - Various products including emergency loans |
| LendingPoint | Suitable for those with lower credit scores - Loan amounts from $2000 to $36,500 - APR from 7.99% to 35.99% |
| PenFed Credit Union | No origination fee - No prepayment penalty fees |
| Upstart | Ideal for fair credit borrowers - Next-day funding - Utilizes AI for approvals |
| Upgrade | Minimum credit score of 560 - No early repayment penalty - Low borrowing limit of $1,000 |
Here’s what Andrew Cartwright has to say about securing four short-term loans quickly, even with a 300 FICO score, in just 24 hours:
What is the shortest term for a loan?
Short-term loans have the name for a reason. They need to be paid off somewhere between six months and up to one year. The longest time possible is 18 months.
What is the best option for short-term business loans?
The best option for one of these short-term business loans is a fixed rate type. They can be risky, and you want to watch out for traps like prepayment penalties.
Conclusion
Short-term loans can be a viable solution for immediate financial needs, but they require careful consideration and planning to ensure they fit within your overall financial strategy. By taking the time to assess your needs, research options, and plan for repayment, you can utilize short-term loans effectively without jeopardizing your financial health.
Remember, the key to benefiting from a short-term loan lies in understanding the terms, managing the loan responsibly, and choosing a lending option that aligns with your financial goals and capabilities.
READ MORE:
- How to Get a Small Business Loan
- Business Loan Terminology You Need to Know
- Small Business Financing Options
- A Complete Guide to the Small Business Loan Documents You’ll Need
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