How To Get A Short-Term Business Loan

Posted at 07:00h in Small Business Financing by Kelly Hillock

The need for quick, short-term financial support is a common challenge many small businesses face. Whether it’s to bridge a cash flow gap, fund a sudden opportunity, or manage seasonal variations in sales, short-term business loans often come to the rescue. Compared to long-term business financing, these loans provide a lifeline, offering benefits such as flexibility, speed of funding, and the potential to boost business credit.

Below, we will look into the essentials of acquiring a short-term business loan, discussing everything from qualification requirements to the application process, ensuring you’re well-equipped to secure the funding your business needs when it matters the most.

Where to get short-term business loans?

Short-term business loans offer a quick infusion of capital. The three primary sources for these loans are SBA microloans, traditional lenders like banks and credit unions, and alternative lenders.

SBA microloans, backed by the Small Business Administration, typically offer lower interest rates and extended repayment terms of a maximum of six years, making them a cost-effective choice. Traditional lenders like banks and credit unions are known for their reliability and structured loan products but may have more stringent qualification criteria. Alternatively, online loan aggregators that work with alternative lenders, often provide faster approval with less stringent requirements, making them a good option for businesses needing quick access to funds. However, they might come with higher interest rates and shorter repayment terms than traditional lenders.

How to qualify for a short-term business loan

Securing a short-term business loan requires meeting specific lender criteria. This section will explore qualifications such as credit scores, annual sales revenue, business age, and the necessity of collateral or personal guarantees.

Credit score requirements

Lenders assess both personal and business credit scores to evaluate the creditworthiness and character of a business. A good personal credit score, typically above in the fair to excellent range, is good for owners and primary stakeholders. Business credit scores are also examined, with a score range of 0-100; a score above 75 is often preferred. These scores reflect the business’s credit history, including payment reliability and debt management. Higher scores can lead to more favorable loan terms, while lower scores may necessitate higher interest rates or additional collateral.

Annual sales revenue

Annual sales revenue helps lenders to gauge a business’s profitability and viability. Lenders thoroughly examine this revenue and its year-over-year trends to assess the business’s financial health and capacity to repay the loan. A minimum annual revenue of $250,000 is often a baseline requirement. To showcase their sales revenue, businesses should provide detailed income statements. If there are significant fluctuations in sales revenue compared to the previous year, businesses can offer an analysis of the factors influencing these changes, whether they are market trends, operational shifts, or unique business challenges. This transparency helps lenders understand the business’s context and financial planning.

Age of the business

In assessing loan eligibility, lenders often consider the age of a business as an indicator of its stability and long-term viability. Generally, a business with a longer operational history is more likely to maintain profitability and fulfill its loan obligations. While online lenders may require a minimum operational history of six months, traditional lending institutions like banks often seek an extended period, usually up to two years, to establish a track record of business stability and success.

Collateral & Personal Guarantee

Securing short-term loans usually involves collateral or personal guarantees to reduce the risk for lenders. Collateral refers to business assets pledged by a borrower, which can be seized if the loan isn’t repaid. In contrast, a personal guarantee is an individual’s commitment to repay the loan personally if the business fails to do so. Alternative lenders may offer more flexibility with these requirements, especially if the business boasts a strong credit history, making them a viable option for those unable to meet traditional collateral demands.

How to get a short-term business loan

The process of obtaining a short-term business loan involves several key steps. Clearly understand your business’s specific financing needs and how a loan aligns with your goals and capabilities.

1. Determine your financing needs

Acquiring a short-term business loan starts with thoroughly analyzing your small business’s financial needs. Consider questions such as the reason for seeking financing, the loan amount needed, strategies for loan repayment, and the type of loan that best suits your requirements. Whether it’s an SBA microloan, equipment financing, or a working capital loan, understanding these aspects is crucial in selecting the right loan and lender for your business.

2. Ensure you meet loan qualification requirements

Qualifying for a short-term business loan requires meeting several criteria. First, your credit report for both personal and business credit histories will be checked, so ensure they are healthy. Your business should demonstrate a solid annual revenue, ideally with a low debt-to-income ratio. Operational history is also a factor, with a minimum of 6 months typically required. Have an updated, detailed business plan ready, and prepare collateral if necessary. Remember, specific requirements can vary, especially between traditional lenders and those offering SBA-backed loans.

3. Compare lenders based on loan terms

Choosing the right lender for a short-term business loan requires careful comparison and due diligence. Focus on the loan’s maturity terms, interest rates, and repayment frequency, ensuring they align with your business’s financial capabilities. Also, consider the processing fees and the overall flexibility of the loan terms. Each lender offers a unique package, so your task is to find the one that best suits your business’s immediate needs and long-term financial health.

4. Fill out the loan application

After selecting a lender and confirming you meet their loan requirements, the next step is to complete the loan application. This can typically be done online or in person. Ensure you attach all necessary documentation, such as your income statement, balance sheet, and income tax returns. These documents will give the lender a comprehensive view of your business’s financial status.

5. Accept loan terms and close the loan

The final step is to review the loan agreement thoroughly. Understand all the terms, including the repayment schedule, interest rate, and additional fees. Don’t hesitate to compare offers from different lenders or ask for clarifications on any agreement aspects. Once you’re confident that you’ve secured the best possible deal for your business, accept the loan terms and close the loan.

While short-term business loans are one of the most-sought after temporary financing solutions, there might be times when your loan application gets rejected. It is not the end of the road, as there are many other sources of short-term financing that small businesses can explore.