Last Updated on April 6, 2023
According to the United States Small Business Administration, the biggest challenge that small business owners face on a day-to-day business – and the biggest threat to their financial future and the security of their small business – is securing the funding and financing they need to succeed today.
Traditional lending institutions’ business loan approval rates sit at about 30%, which means that 7/10 small business owners that go to a bank or credit union for a traditional business loan are going to be turned away.
This is the number one reason that businesses shut down, the number one reason businesses do not grow or expand, and the number one reason entrepreneurs do not take advantage of opportunities as they become available.
Thankfully though, with the help of short-term business loans and nontraditional business loans you can get the financing you need to build the business of your dreams without handicapping your long-term financial future.
Highlighting the Key Differences Between Short-Term Loans and Long-Term Loans
The first thing you need to understand is that there is a world of difference between short-term loans and long-term loans in the business financing realm.
Short-term business loans usually have term lengths that stretch up to two years and usually no longer than that, though from time to time you can get a nontraditional lender to offer you a 36-month loan – but only in rare circumstances.
Long-term business loans, on the other hand, usually have terms that stretch out to five years or longer. These are the kinds of loans that big banks, credit unions, and traditional lenders are interested in offering because they know they are going to be able to make a lot of money on interest.
At the same time, long-term business loans are only ever made available to business owners with a mountain of experience under their belt and credit scores that are above 680. If you do not meet these criteria (and aren’t willing to wait 30 days or longer for the long-term loan application process to play out) you would be much better off searching for top-tier short-term loans instead.
Common Uses of Short-Term Business Loans
There are a number of different reasons that business owners choose to take advantage of short-term business loans, with the most common being to help shore up cash flow issues that can be pretty unpredictable when you’re talking about a small business.
Small businesses do not have the bottomless budgets or marketing departments that major corporations and multinational operations have, but instead have cash flow issues that can look really flush one month and then dry up almost completely the next – with absolutely no rhyme, no reason, and no warning.
Short-term loans are designed to help you “float” those lean times with a reserve of cash that will not put you behind the eight ball when it comes to your long-term financial future.
Small business owners are also taking advantage of these kinds of financing packages to secure new inventory, to take advantage of expansion opportunities, and to invest back in their business to grow and scale so that they can support more efficient and optimize cash flow and avoid these kinds of financing issues altogether in the future.
Typical Short-Term Business Loan Financing Options
Business lines of credit are very popular short-term lending packages, if only because they provide you to a pool of cash and capital that you can tap into as necessary without having to pay back the entire principal with interest over the term of your loan.
Think of this as a “credit card for your business” without the actual credit card component. You may be extended a line of $50,000 worth of credit that you can pull from. If you take $5000 from that line of credit you’ll only ever have to pay back that $5000 principal and the interest on it, with an opportunity to use up to that $50,000 as need be.
Unsecured business loans are similar to traditional business loans you get from a major lending organization or a big bank, though these short-term financing packages usually come from more nontraditional lenders with (obviously) shorter repayment terms.
Merchant cash advance programs are another approach that you might want to take advantage of as a small business owner looking for short-term financing, essentially “buying” a cash advance on your merchant account and future sales to get cash in your business today.
Highlighting the Big Benefits of Short-Term Loans
There are a lot of big benefits to taking advantage of short-term business loans, but the biggest of them all have to be:
- A much faster loan application and approval process
- Friendlier interest rates and repayment timelines
- (Usually) No prepayment penalties if you have the opportunity to pay off the short-term loan early
- The ability to get access to the cash you need without strapping yourself financially for years and years to come
Sure, traditional long-term business loans might give you access to more capital than short-term loans can – but that’s really the only advantage they have over short-term financing options.
Touching on the Drawbacks of Short-Term Business Loans
On the flip side of things, not all is sunshine and roses when it comes to short-term business loans, either.
You will almost always be working with nontraditional lenders that do not have the institutional security or confidence that you might have with traditional banks and credit unions. You’ll really have to do your research and due diligence to be sure that you are only ever securing these financing packages from companies you can trust.
Secondly, you’ll have to shop around for different financing offers and pay close attention to the fine print on every short-term loan you consider moving forward with. There are some shady operators in this nontraditional lending space that look to take advantage of cash strapped entrepreneurs – that’s the last thing you want to have happened to you!