Short Term Business Financing Options
Short-term small business loans are a type of commercial financing that usually have a repayment term between 1-24 months (as opposed to traditional bank loans with terms ranging between 5-25 years) and are often used for immediate uses — instead of for long-term investment. Being that this type of funding is only needed for a short period of time, the funding size of these types of financing facilities are often smaller than traditional longer term loans. Often, a business will use short-term funding to fill the gaps in the financial holes in a company’s business cycle.
Short-term business financing used for working capital, bridging the company’s financial obligations, purchase of small business machinery, equipment, inventory, supplies and furniture among other business needs are usually structured in three types of facilities: term loans, lines of credit and factoring/cash advances. Each of these types of facilities are offered through thousands of lenders that tailor these types of funding to meet both the borrowers’ and the lenders’ needs.
While short-term small business loans share shorter repayment terms, rates and structures among short-term business lenders vary greatly depending on the commercial loans structure. Let’s look at the differences.
Short-term Business Loan Uses
Short term loans are offered by nearly all types of business lenders, including almost all traditional and alternative lenders. Such short term loan products are offered by small and large bank lenders, credit unions and community banks, instititutional lending groups, factoring companies and merchant cash advance lenders. Below we will look at each lending option, along with the pros and cons associated with each form of capital.
|Bank||6-10%||14-30 years||14-30 days|
|SBA||6-10%||3-7 years||10-30 days|
|Line of Credit||5-15%||1 – 3 years||7-30 days|
|Alternative||6-25%||1-5 years||5-7 days|
|Cash Advance||1.16-1.55||3-24 months||1-3 days|
|Invoice Finance||1-2% weekly||1 – 90 days||1-3 days|
Short Term Bank Lending
Traditional banks (large banks, small banks, community banks and credit unions) offer short term financing in as both term loans and lines of credit. Traditional bank lending is by far the cheapest financing option for a company, but that’s generally because banks are unwilling to expose themselves to much risk. So in order to qualify for short-term bank financing, you and your company will need excellent credit, good cash flow, and sufficient collateral to cover the lender’s losses should you default.
- Rates: 6-10%
- Terms: 1-5 years
Short Term SBA Lending
The Small Business Administration’s short-term financing options generally fall under the SBA’s main loan program: the SBA 7(a) program, including the SBA Express program and the SBA Microloan program. While many banking lending institutions have access to the SBA-enhanced funding of smaller, short-term financing, there are a few that specialize in the programs. Those that do have an expedited application and due diligence process, and can fund within 10 business days.
- Rates: 6-8%
- Terms: 3-7 years
- Fees: low
- Funding time: 10 days
SBA Microloan program offers small businesses access to short-term working capital (up to 6 years) with a streamlined process that allows the SBA to approve most of the small business loans in 36 hours. Rates for SBA Microloans are generally between 8-13%.
Alternative Short Term Lending
While bank loans and SBA financing are ideal funding options, the chances of meeting the lenders’ requirements to obtain those loans can be difficult. Even if a company does meet the requirement required for a traditional bank or SBA loan, the process may take too long to meet the capital needs of the company. Therefore a better option may be a short term alternative small business lending. Mid prime alternative loans are loans that aren’t quite bank-rate, but are also not extremely expensive like other forms of business capital, like cash advances and factoring.
- Rates: 7-25%
- Terms: 1-5 years
- Fees: Can be substantial
- Funding time: 3-7 days
Short Term Invoice Factoring
Invoice financing (often referred to as “invoice factoring” or just “factoring”) is a way for companies to obtain short-term capital through the sale of their existing accounts receivables. A company will either sell their invoices, or use their unpaid invoices as collateral to obtain fast funding for short-term purposes. With factoring, the company sells the invoice at a discount, and with invoice financing, the company will get forwarded a percentage of the invoice’s value (minus a fee) and are forwarded the remaining when the invoice is paid-in-full.
- Rates: 1-3%
- Terms: Until invoice is paid
- Fees: Can be substantial
- Funding time: as little as 24 hours
Cash Advance Funding
Merchant cash advance business financing is usually the quickest-funding short term financing option available. But in return for the speed of funding are much higher rates than other forms of commercial financing. Business cash advances aren’t small business loans but are instead the sale of either future credit card deposits and/or bank deposits. The cash advance funder will provide a loan amount along with a set repayment amount, and then deduct daily payments from the company’s bank account deposits each business day until the agreed upon payment is paid off.
- Factor rates: 1.16-1.55
- Terms: 4-24 months
- Fees: varies
- Funding time: 1-3 days