What is a short term business loan?
A short term business loan is typically paid back over a period of time ranging from 3 months to 18 months.
Unlike a longer business loan, a short term business loan can be either secured or unsecured. This can make a short term business loan a quick, flexible option for businesses looking for fast funding.
The most common forms of short term business finance typically include:
- Bank overdraft
- Credit card
- Line of credit
Why would a business want a short term business loan?
There’s a range of different reasons why a business would be seeking a short term business loan.
1. Stay afloat during seasonal challenges
Some seasonal businesses rely on short term loans to navigate the quieter months of the year or to adequately prepare for their busy seasons. These businesses often experience fluctuating revenue streams, with certain times of the year generating significantly higher returns than others.
For instance, retailers might see a spike in sales during the holiday season, while tourism-related businesses may thrive in the summer months. During the quieter periods, however, maintaining operations, paying staff, and managing overhead costs can become challenging.
A short term business loan provides the necessary funds to ensure these seasonal businesses can continue to function effectively during off-peak times. This financial support allows them to cover essential expenses, such as rent, utilities, and payroll, even when income is limited.
Additionally, these loans enable businesses to invest in marketing, inventory, or staff training in preparation for the upcoming busy season. By securing short term financing, seasonal businesses can stabilise their operations, enhance their readiness, and capitalise on peak periods, ultimately leading to stronger performance and profitability throughout the year.
2. Flexible terms
Short term business funding can offer greater flexibility than long-term loans, making it an attractive option for many businesses. Lenders in the short term financing space can often offer plans that encompass adjustable repayment terms, different interest rates based on risk profiles, and various repayment options that suit the business’s cash flow cycle.
For instance, a business may negotiate terms that align with seasonal revenue fluctuations, enabling them to manage repayments more effectively during leaner months.
Long-term loans can lock borrowers into fixed repayment schedules that may not always align with their financial realities. With short term business finance, companies typically pay off the loan more quickly, which can result in lower overall interest paid. This can be particularly beneficial for businesses that need quick access to capital without the burden of extended repayment periods.
Ultimately, the adaptability of short term financing not only helps businesses manage immediate cash flow needs but also allows for strategic financial planning, contributing to healthier financial outcomes in the long run.
3. Capitalise on market changes
Regardless of your industry, being prepared to adapt quickly to market changes is essential for maintaining competitiveness. When a new product or service suddenly becomes essential — whether due to shifts in consumer behaviour, technological advancements, or unforeseen global events — your business should act swiftly. This often requires investing in new technology, increasing production capacity, or hiring additional staff to meet rising demand.
In such scenarios, short term business financing can be a valuable resource. With quick access to funds, you can seize opportunities without straining your existing financial resources.
This financial flexibility allows you to upgrade equipment, enhance your digital infrastructure, or expand your workforce, ensuring your operations remain smooth during transitions.
Ultimately, the ability to adapt and respond promptly to market changes, supported by the right financial support, can position your business for long-term success.
4. Improve cash flow
One of the most common reasons businesses seek short term loans is to enhance their cash flow. Maintaining a healthy cash flow is critical for any operation, as it affects your ability to pay employees, cover overhead costs, and invest in growth opportunities.
In today’s dynamic business environment, cash flow challenges can arise from various sources, including seasonal fluctuations, unexpected expenses, or delayed payments from clients. When cash flow tightens, it can create a ripple effect that hampers overall productivity and growth.
Supply chains can be particularly vulnerable; if one component falters, it can have a significant impact on your entire operation. For instance, if a supplier fails to deliver on time, it can disrupt production schedules and delay product availability, potentially leading to lost sales.
In such situations, a short term business loan can provide the necessary funds to bridge gaps in cash flow.
This influx of cash allows you to pay suppliers promptly, restock inventory, or manage operational expenses, ensuring that your business continues to run smoothly even when unforeseen challenges arise.
By enhancing cash flow through strategic financing, you position your business to navigate uncertainties while maintaining a focus on growth and long-term success.
Things to consider
- Check what’s required
Lenders will assess your application based on your business risk level and will want to know things like your profitability, time in operation and industry
- Make sure the repayment schedule works for you
Some lenders require daily repayments, so compare your options in advance
- Ask about other charges and fees
Lenders might not always be upfront about hidden fees.
- Ask if you can repay early without penalty
Some lenders charge a fee or penalty if you want to repay your loan early.
TL;DR
A short term business loan is a financing option typically repaid within 3 to 18 months, and can be secured or unsecured, typically including bank overdrafts, credit cards, or lines of credit.
Fast access to funds is possible, making it suitable for businesses:
- Facing seasonal fluctuations
- Needing flexible terms
- Looking to capitalise on market changes
Businesses often seek these loans to improve cash flow, invest in new technology, hire staff, or navigate unexpected expenses.
Advantages include easier qualification processes compared to traditional loans, especially for those with lower credit scores or shorter earnings histories. However, it’s essential for borrowers to understand repayment schedules, potential hidden fees, and any penalties for early repayment.
