Short-term business loans can get you the funds you need to overcome cash flow gaps, handle emergencies and unexpected expenses or finance a small expansion.
These loans and lines of credit typically come in amounts from $5,000 to $250,000, carry short repayment terms of a few months to several years, have looser qualifications than long-term loans and provide cash quickly.
Because short-term business loans generally have high borrowing costs, the smartest approach is to choose financing with the lowest annual percentage rate you can qualify for. Lines of credit are more flexible and generally have shorter repayment periods, while loans tend to offer a longer term.
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Pitfalls of short-term business loans
Repaying a short-term business loan on time can help you qualify for a long-term business loan in the future. Long-term loans typically come in amounts from $250,000 to $1 million or more, are less expensive and have a repayment period of five to 15 years or longer, making them better suited to a real estate purchase, business acquisition or debt refinancing.
Short-term lines of credit: Kabbage and Dealstruck
With Kabbage’s line of credit, you borrow only the money you need and pay fees just on the money you borrow. That flexibility makes it a better option for managing cash flow than for a larger expense such as an expansion. You repay each draw on the line of credit over six or 12 months.
It’s also fairly easy to qualify (take a look at minimum qualifications below) and a good option for borrowers with bad credit. Although Kabbage does check your credit scores, it doesn’t weigh them as heavily as other factors, such as your average monthly revenue.
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Before you apply for a Kabbage loan, find out whether you meet the minimum qualifications.
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Dealstruck offers an inventory line of credit, which lets you finance 100% of your inventory purchases up to $500,000, and an asset-based line of credit, which lets you borrow up to 85% of the amount of your outstanding invoices, up to $500,000. You repay borrowings from either line of credit over six months. There are no prepayment penalties, so you can repay early to save on interest.
The inventory line of credit is good option for retailers or any business that has recurring inventory purchase needs, while the asset-based line of credit is good for businesses that have cash tied up in unpaid customer invoices.
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Before you apply to Dealstruck, make sure you meet the lender’s minimum qualifications.
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Short-term loans: OnDeck and StreetShares
OnDeck is a good option for small-business owners who need fast cash for a small expansion, such as a marketing campaign. The lender provides short-term business loans repaid daily or weekly over three to 36 months. Besides meeting OnDeck’s minimum qualifications, your business must not be on its restricted industries list, and you can’t have had any bankruptcies in the past two years.
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Before you apply for an OnDeck loan, find out whether you meet the lender’s minimum qualifications.
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If you don’t qualify for OnDeck due to its annual revenue requirement or you prefer weekly rather than daily repayments, StreetShares is an option. You repay its loans over three to 36 months. Businesses can qualify for a loan amount of up to 20% of their annual business revenue; for example, a business with $300,000 revenue could qualify for up to $60,000 in financing. StreetShares also doesn’t charge a prepayment penalty, so you can repay the loan early to save on interest.
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Before you apply for a StreetShares loan, find out whether you meet the lender’s minimum qualifications.
StreetShares is currently unavailable to borrowers in North Dakota or South Dakota. Do I qualify? ▾
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The pitfalls of short-term business loans
Of course, there are a few disadvantages to short-term business loans that small-business owners should keep in mind:
Higher cost: They typically carry a higher APR — the total annual cost of borrowing, including all fees and interest — than long-term loans. That’s due to their shorter repayment period, faster funding, looser qualifications (lower credit score and revenue requirements) and the fact that many are unsecured business loans, which don’t require collateral.
More frequent repayments: Lenders may require you to make loan payments daily or weekly as opposed to monthly. Although these payments are smaller, they can be an issue for businesses that have uneven sales or those that don’t always hold much cash in a bank account. You’ll have to make sure you have enough money in your account to make the payments at all times, or you’ll risk incurring fees or defaulting on the loan.
Risk of debt trap: The speed and ease of short-term business loans can become addictive. Instead of repaying the debt in full, business owners may be enticed to refinance and roll over the debt into a new loan. But this can result in a debt trap: continual refinancing just to keep up with payments. This is a common issue with merchant cash advances, a costly form of short-term financing that can carry an APR over 300%. If you have several high-interest small-business loans, business debt consolidation may be the solution you need.
Find and compare the best small-business loans
NerdWallet has created a comparison tool of the best small-business loans to meet your needs and goals. We gauged lender trustworthiness, market scope and user experience, among other factors, and arranged them by categories that include your revenue and how long you’ve been in business.
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This article was updated June 21, 2016. It was originally published Jan. 12, 2016.
Steve Nicastro is a staff writer at NerdWallet, a personal finance website. Email: Steven.N@nerdwallet.com. Twitter: @StevenNicastro.
To get more information about funding options and compare them for your small business, visit NerdWallet’s small-business loans tool. For free, personalized answers to questions about financing your business, visit the Small Business section of NerdWallet’s Ask an Advisor page.
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