Understanding Short Term Business Loans

finance

A big part of being successful in business is the ability to quickly get access to short term loans. Particularly in the early stages when you might not have the cashflow to meet your business needs, you might need some short-term assistance with bridging a gap until a client settles an invoice or to procure stock for sale. Short-term business loans are popular in these cases as you can settle them quickly, which means they aren’t attracting long term interest and commitment.

There are a few different options that you have for short-term business loans. 

Merchant Cash Advances

While this isn’t strictly a loan, it can often end up filling in the space where you might otherwise have needed a loan. A merchant cash advance is when a lender will buy your future credit card sales. You can see then why this might take on the same purpose as a loan.

You repay these loans through your point of sales device by allowing the lender to take a percentage of each credit card transaction you make towards repaying your loan. It’s a versatile and flexible way to get access to credit as you aren’t generally locked into a specific payment plan, but rather each day you process credit card payments, you’re slowly repaying your loan.

Lines of Credit

The easiest way to think of a business line of credit loan is that it works very much like a credit card. You’ll apply for a line of credit, and the lender will give you a credit limit. You can use this credit limit to access cash whenever you need it, and then repay whatever amounts you use gradually over time. 

It’s popular because of its flexibility, and it often ends up being cheaper than a business credit card, particularly if it’s cash you need as credit cards attract quite high cash advance fees.

Invoice Financing

A very specific, but also very useful, form of short-term business loan is invoice financing. As the name suggests, this loan involves your lender giving you an advance on outstanding invoice amounts. Once your customer pays that invoice, the lender will take their advance back, less the interest amount accumulated on that advance, and return the balance to you.

In essence, the invoice is being used as collateral against a loan; it is easy to get approval and it’s quite cost effective.

Short-Term Loans

A short-term loan is the most classic type of short term business loans. You’ll apply to a lender for a lump sum of cash, for which the lender will offer you a payment plan and interest percentage. If the terms are agreeable, the lender will pay you the agreed sum, and you will repay the loan on a regular schedule, including interest and fees. These loans are available over short terms, with very flexible repayment schedules – even weekly or daily payments.

While these four loan types are perhaps the most common, they’re not the only loans available to businesses. Understanding how to finance your business through equity and loans is imperative knowledge to have as a small business owner.