Everything You Need To Know:
What Is A Short-term Business Loan? Is It Right For My Business?
A short-term business loan is designed to be repaid over a 1 – 2 year period. It enables business owners to access instant cash that can then be invested in their business. At SME Loans, businesses can receive a short-term business loan between the value of £1,000 and £500,000. The loaned money then gets repaid with interest in scheduled monthly payments over a relatively short time period (most commonly 90 – 120 days).
Short-term business loans are a flexible funding option that are typically quicker and easier for small to medium sized businesses to get approved for. They are available to UK businesses registered as a limited company, operating as a sole trader, or in incorporated partnerships.
Is A Short-term Business Loan Right For My Company?
Unlike other business finance products, short-term business loans are the perfect solution for smaller businesses that need to access funds without wanting to make lengthy commitments. Generally speaking, short-term loans are used when businesses want to borrow a lower amount of money. Because of this, they are a reliable way to source finance for business emergencies and time-pressing ventures.
Businesses will need to look at their specific characteristics and conditions before deciding whether short-term financing is their best funding route. The growth hub and business support helpline can help companies who are confused or need extra advice.
Advantages & Disadvantages Finance For All Business Purposes
Advantages Of Short-term Business Loans
The main advantage of opting for a short-term business loan, is that you will only have to make repayments for a short period of time. This means that taking out the loan won’t harm your business’s finances or implicate growth in the long term. In addition to this:
- Applying is simple, requiring little paperwork;
- It is easier for SMEs to get approved by short-term finance lenders;
- They are quick and easy to arrange, funds can be accessed in just 24 – 48 hours
Disadvantages of Short-term Business Loans
Like all debt financing, short-term business loans come with risks. Before taking out a loan, businesses should ensure they have a plan in place to make repayments, to prevent defaulting on the loan agreement.
Businesses can benefit from the Business Debtline’s budget tool, which helps business owners narrow down the right funding solution for their company. It is also important to note that short-term business loans tend to have higher interest rates than medium and long-term loans, so its important to ensure the chosen lender gives the best deal possible.
Short-term Business Finance For All Purposes
Startups can benefit from short-term business loans by using them to fund set up costs and operations in their early stages. Consider short-term financing to cover the following costs:
- Incorporation fees
- New premises and/or equipment
- Damage deposits
- Advertising and promotion
- Purchasing inventory
- Business website
- Recruiting staff
- Staff Training
- Legal work
Similarly, small to medium sized businesses can often require external financing to fund new ventures for growth and success. SMEs can consider a short-term business loan to cover the costs of:
- Expansion (of workforce of premises)
- Purchasing equipment
- Replenishing inventory
- Staff training
- Advertising and marketing
- Managing cash flow
- Emergency repairs
How Do Short-term Loans Work? Short-term Business Loans Interest Rates
A business owner interested in applying for a short-term business loan should start by filling out the application form. Basic details are required to verify the business, so be prepared to disclose the:
- Name of the business
- Number of years trading
- Required loan amount
- Average monthly card sales
Lenders will also want to find out more about the business’ director, so expect to provide contact details including:
- Title, first name and surname
- Position in company
- Contact details
Once the application form is completed, it will be processed and approved by a lender who will be able to give the business owner a quote. The lender will then get in touch to discuss the terms of the loan agreement.
The lender’s terms will include an interest rate that will impact how much the business is expected to pay back each month. In the event that circumstances change, SME Loans offers a 1-month cooling off period to businesses who apply for a short-term business loan.
Depending on a business’s credit score and how much money it’s looking to borrow, business owners may be asked to sign a personal guarantee. A personal guarantee is a legally binding contract that agrees in the event of a company defaulting on loan repayments, the business owner / director becomes responsible for repaying the lender.
As previously mentioned, short-term business loans tend to have higher interest rates than loans that are taken out for a longer period. Essentially businesses pay slightly more for the speed and flexibility that short-term business loans provide. The good news is that the money paid back each month is fixed, so there won’t be any nasty, expensive surprises along the way.
Expect to come across the term Annual Percentage Rate (APR). This refers to the total interest that will be required to be repaid annually on the given loan amount. It takes into consideration any additional fees, so provides as an accurate representation of the full cost of the loan. Because short-term business loans interest rates can vary from lender to lender, it’s a good idea to go through a comparison site if not using a broker – to ensure the best deal possible.
Short-term Business Loans Bad Credit
When applying for short term business loans online, its important to remember that credit scores and history can impact the chances of successful application. Lenders will check a business’ credit score using a credit reference agency, as this indicates a business’s reliability for repayments.
Short-term business loans are one of the easier finance products to apply for, particularly if your business suffers bad credit. Please be advised that where a business has bad credit, lenders will want to check the personal credit score of company directors.
In order to boost a business’ credit score, the business owner should regularly monitor the information provided, to ensure its correct and up to date.
- Pay County Court Judgements (CCJs) on time
- Pay invoices on time
- Submit business accounts & files by the deadline
- Proactively inform credit reference agencies about relevant business information