Small Business

Short-Term Business Loans: What Startups Need to Know

Entrepreneur accepting business loan

Start-ups are too reliant on series fundings. There is a simple financial solution for their cash flow gaps.

Did you know that 82 percent of small businesses that fail also experience cash flow problems? Ensuring a consistent cash flow can prove crucial to the survival of small and medium-sized businesses (SMBs). One way that SMBs can have access to the cash they need comes in the form of short-term loans. Short-term business loans can be a fast and effective way for a business to get the money it needs to stay afloat. But when should a company take out a short-term business loan? What does it take to qualify? What can they expect from short-term business loans for startup businesses?

Why do I need a short-term business loan?

There are many reasons why your company might require a short-term business loan. Maybe you’re looking to expand your business or need to fill a large order and require additional capital. Perhaps your company has hit a rough patch and requires an influx of capital to clear the hump. More often than not, these are all examples of cash flow gaps. The first step in fixing a cash flow shortage is identifying the cash flow gap in the first place. Once your business has determined where it needs financing, it can go about determining how to secure that capital.

What is a short-term business loan and how does it work?

Just like the name implies, a short-term loan is one of the fastest, and most popular, ways for small businesses to find the money they need with a short turnaround. But how do you define a short-term loan? The simple definition is that they’re exactly what they sound like. They’re loans uniquely designed to be dispersed quickly and paid back just as fast.

A short-term loan is intended to be repaid in one year, although they’re often repaid even faster. However, there’s more to a short-term business loan than meets the eye. Although fast access to capital can make a short-term loan look like an attractive option, everything isn’t so simple.

A short-term solution with a steep price

First, short-term loans tend to be more expensive than traditional loans. If you want your money fast, you’re going to have to pay for it. That means you’ll find yourself dealing with higher interest rates that can ultimately hurt your business. There are even short-term loans for businesses with bad credit, but they can be even more expensive.

If you’re confident that you can keep up with a more aggressive payment schedule, and it’s something you only see your business doing once or twice, a short-term loan could be a good option for you. Just be careful to make sure your business doesn’t find itself in a debt trap. What starts off as a blessing can quickly turn into a financial curse if left unchecked.

How do I qualify on a short-term business loan?

One of the biggest hurdles for small businesses across the country is qualifying for a loan. Like most loans, there’s a qualification process involved in being approved for a short-term business loan. This frequently involves providing a record of the cash flow and payment history for your company for the past few years. You’ll also usually need to have a summary of your personal finances and go through a credit check.

Still, even with these aforementioned hoops to jump through, qualifying for a short-term loan can be much easier than for a long-term bank loan. Bank loans can be notoriously difficult to come by, with more than 80 percent of applicants being turned away. This can make short-term loans a much more realistic option for SMBs in their nascent stages.

Can I get a short-term loan for my startup business?

Short-term business loans subscribe to a different set of standards when compared to traditional bank loans. A key difference is that it can be much easier for startups to qualify for a short-term loan. That said, it’s important to remember that, although businesses might not have to supply the same level of financial history, there’s a chance of having to put up additional collateral to offset the risk.

What kind of collateral do I need for a short-term business loan?

When you’re applying for a short-term business loan, you’re dealing with a different set of standards when it comes to qualification. These more relaxed standards also mean that there’s a higher likelihood that your startup will need to provide some sort of collateral. What can be accepted as collateral runs the gamut of available assets. This could range from property to real estate to accounts receivable.

Accounts receivable are one form of collateral that is particularly notable. This is money that your business is already owed, so you can get a loan based on the knowledge that you have incoming capital on the books. The ability to take advantage of invoices you’re waiting to be paid is a driving force of what makes invoice financing work so well for B2B businesses looking to bridge a cash flow gap between invoice payments.

Invoice financing transforms receivables into working capital

Invoice financing is a popular lending alternative for short-term business loans for startup businesses looking to improve their cash flow quickly. Online invoice financing has made the process faster and easier than ever, with startups able to find the cash flow they need in as little as 24 hours.

Online invoice financing uses your accounts receivable in the form of invoices you’ve already created and advances up to 100 percent of the invoice value. Innovative online platforms mean that there’s no unnecessary paperwork to hold up the process of getting you your money.

Transparent fees beat high interest rates every time

One aspect of invoice financing that makes it stand out from other types of short-term business loans is the way in which fees are handled. While other short-term loans for startup businesses can carry high interest rates, costs for invoice financing are designed to be transparent, so startups know what they’re signing up for. This is often a fee that is calculated up-front, so small businesses have all the knowledge they need to make an informed decision.

For startups looking for a straightforward path to a short-term business loan, invoice financing is a valuable and affordable way to get working capital now. As small business loans become increasingly tough to find, making sure you get paid the money you’ve already earned just makes sense.