Are you a small business owner in a more or less small financial pinch? Need money to fix a thing but have no desire to be saddled with debt for years? Taking out a short-term loan might be your solution!
The smartest thing to do would be to compare different providers to get the best rates, but before you get to that part of the logistics, you should know what kinds of different services those providers will likely have on offer.
The most well-known type of short-term loan is the eponymous one. The blatantly named short-term loan is about as straightforward as they get. Think of it as a traditional loan but condensed. You get a sum of cash in the name of your business, and then you have to pay it off, including interest, over an agreed-upon period of time, according to an agreed-upon payment schedule (which typically entails constant increments).
Short-term loans are meant as fast funding, and their payback rates can prove quite tricky. You have to pay them off a lot quicker than standard term loans. Usually, you would need to make the payments weekly or even daily, and they can get pretty high.
The upsides of this kind of arrangement include quick funds, less paperwork than usual, a fixed payment structure, flexibility in terms of business expenses, and availability to people whose credit score is relatively low. Their downsides, though, often prove to be too much. Annually, they are more expensive than long-term loans, and unless you have steady and starry income, the frequent payback calls can be really tough to handle.
To be allowed this kind of funding, you will need to be in business for one year at least, have a personal credit score of over 550, and make a minimum of $50,000 a year. The paperwork you will need to apply includes bank statements, proof of business ownership, your credit score, tax returns, driver’s license, and a business check (voided). Check out this article for some alternative ideas on how to get a short-term loan.
Line of credit
This type of loan works basically like a credit card for business. You get a limited credit that you can draw from whenever you need to, and you repay whatever you spent over a period of time. The key difference between a line of credit and a business credit card is that this loan type deals only in cash. In other words, you avoid the big fees on advances, but you never get any cashback or other rewards. If you care about that difference, luckily these two options do not exclude each other, so you can get both.
If you opt to fund your business with this kind of short-term loan, you get these perks: capital you can access at any moment, great flexibility for business expenses, an awesome chance to build your credit, and interest only accrues on what you actually spend instead of on every penny available.
Moreover, you can get this loan even if your personal credit score is low. The bad sides of the line of credit include constantly updating paperwork whenever you tap into the funds, possibly having to pay a withdrawal fee every time, being faced with higher rates if your credit score is low, and you may be required to put up a collateral.
You need an annual income of $50,000 and six months in business, along with your personal and business tax returns, bank statements, credit score, your balance sheet, voided business check, driver’s license, and your profit and loss statements. Learn more at this link: https://www.nerdwallet.com/blog/small-business/business-line-of-credit/
This is the most accessible and most expensive type, where the lender buys your future credit card sales. Then they intercept some of your revenue from purchase points on a daily basis until your advance is fully paid back.
This has a few upsides: it gets approved easily, gives funds fast, is flexible, adjusts to your daily business flow, and is available to low credit scorers. On the flipside, the fees are high, it chokes your cashflow, and changing your merchant service provider is hard.
If you do decide to go for it, you need a year in business, a credit score of over 500, and minimal yearly income of $50,000. The necessary papers are your credit score, bank statement, credit card processing statement, driver’s license, voided business check, and your business tax returns.
This kind of a short-term loan is extremely specific in its application. Its only purpose is to bail you out when your cashflow is stuck due to piled up outstanding invoices. A lender takes a look at the total worth of those invoices and then advances you a given percentage of that sum. The interest that accumulates on this advance is determined by the number of weeks by which the invoices have been outstanding by the time you get your loan.
When a customer completes an invoice, your lender intercepts it for whatever percentage remains, claims the interest from that amount, and then forwards the remaining money to your business. This short-term loan is fairly easy to get, since your outstanding invoices are used as collateral in the arrangement.
Three big perks of invoice financing loans are that none of your other assets have to be risked, lender will look at the credit score of the business, instead of your personal, and you will not need to wait ages to get the value of an invoice. The two pitfalls to consider are that it is rather expensive in the long run and that it tends to boast higher fees than more traditional methods of financing.
To qualify, you need a minimum revenue of $50,000 and to be in business for six months or more. The application documents you need include your business’ credit score, the outstanding invoices, bank statements, your driver’s license, and a voided business check.
- Pros and Cons of Financing a Business
- Comparing Loans Before Starting Your Own Business
- 5 Key Benefits of Invoice Financing for Your Small Business
- Evaluating Financing Options for Your Business: Myths and Facts
- Minimize the Risk to Your Personal Credit When Starting a New Business