What is a Short Term Business Loan?
A short term business loan is a type of finance designed to provide businesses with a quick injection of cash that is repaid over a shorter period than a standard loan, usually up to 24 months, although the duration considered short term can vary between lenders. This form of borrowing is particularly useful for businesses that need to cover a temporary cash flow gap, handle unexpected expenses or take advantage of an opportunity that requires fast access to capital.
Unlike long-term loans which are often used for significant capital investments like buying property or machinery, short term loans are for immediate and more manageable needs. This could include purchasing a seasonal amount of inventory, covering payroll during a slow period or paying for an unexpected equipment repair. The speed of the application and approval process is the advantage, with many short term loans being approved and funded in a matter of days, which is much faster than the process for a longer term loan.
For small and medium-sized businesses, short term loans can be a way to manage the day to day challenges of running a company. They provide a flexible solution that can help a business respond to market changes and maintain a healthy cash flow without committing to longer term loans.
The Main Types of short term Business Loans
Short term business loans come in a few different forms, each with its own structure and purpose. The choice depends on a business's specific needs and its financial situation.
Unsecured short term Loans
An unsecured short term loan does not require a business to provide collateral, such as property or equipment to secure the funding. The lender's decision is based primarily on the business's financial performance, credit history and cash flow. While the lack of collateral reduces the risk for the business it may mean a higher interest rate and a slightly lower borrowing limit to reflect the increased risk for the lender. This can be an option for businesses that do not have assets to use.
Secured short term Loans
A secured short term loan requires a business to use an asset as collateral. This could be a commercial property, a vehicle or machinery. Because the loan is secured, lenders are often willing to offer a higher borrowing limit and a lower interest rate. This type of loan is suitable for businesses that have valuable assets and are comfortable using them as security to access more affordable finance. The secured aspect of this type of loan does impact the speed of the application, due to increased complexity, and scrutinise all costs including set up charges.
Bridging Loans
Bridging loans are a very specific type of short term finance, often used to "bridge" a funding gap for a short period, typically from a few weeks to a year. For example, a business might use a bridging loan to purchase a new commercial property quickly while they are waiting for finance to be released from another transaction. The loan is usually repaid with the proceeds from the sale of another asset or from longer term finance once it is in place.
Short Term Loans in the Context of Business Finance
Short term loans are a part of a business’s wider funding strategy and should be considered alongside other forms of finance. A short term loan is a complementary tool that provides flexibility and responsiveness.
For a small business that is experiencing a seasonal drop in sales a short term loan can help to cover expenses during the quiet period, with the expectation that it will be repaid once sales pick up. For a growing business, a short term loan can be used to purchase a large order of new stock to meet an increase in demand.
The availability of short term loans from a variety of lenders, including traditional banks and a wide range of alternative finance providers, means that businesses have more options than ever before. These providers often have more flexible lending criteria and a faster application process, making them an accessible option for many businesses. Ultimately, short term loans provide a flexible and quick to access solution for businesses to manage their cash flow and take advantage of opportunities as they arise, it is a loan to match the circumstances.