A short-term business loan, otherwise known as a short-term commercial loan, provides businesses an opportunity to obtain needed capital, for any reason quickly, usually within 48 hours.

This type of loan is considered the “Swiss Army Knife” of loans because of its usefulness and flexibility. Instead of pulling cash from other areas of a business’s revenue, tapping into personal savings or home equity, businesses can leverage short-term loans to cover expenses while maintaining daily accounts payable.

Short-term business financing can come in several forms, such as an installment loan, a line of credit, revenue based financing like a cash advance, or an invoice factoring. The typical structure is laid out below.

Many of these loans can be applied for and received very quickly (same day in some cases), and there are many providers to choose from. You simply submit your application (usually online), business bank statements or other credit information. Then the company reviews it and gives you an offer of the terms of the loan including the amount, interest rates, fees and repayment schedule. If you agree, you sign the contract and get your money the same or next day, often in as little as 24 hours.

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There are few guidelines on how the funds must be used. Regardless of whether the business is looking to fill a gap in its cash flow, capitalize on an exciting opportunity or pay off an emergency expense, a short-term business loan can provide the business with an easy and quick solution to obtain the financing it requires.

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Since short-term business loans have a quick funding timeframe, they tend to have a higher interest rate than other financing options. If payments are paid on time whether it is on a daily, weekly or monthly basis, the business can boost its credit score so long as the lender selected reports good payment history to the credit agencies (Experian, Payment, Dun and Bradstreet).

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This type of debt is a lot more lenient than a traditional bank loan when it comes to eligibility requirements. For example, it will be easier for business owners to qualify if they have a low credit score, shorter history of business or lower annual revenue.

Companies may consider short-term business loans for a variety of circumstances:

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• Funds needed for a specific investment

• Businesses may need new financing to start a new project or expand.

• A large purchase 

• Companies may rely on credit cards to make purchases, but that won’t always work. A short-term business loan may come in handy if a large purchase can’t be covered by a credit card.

• A matter is time-sensitive

• Coming up with a quick solution like a short-term business loan can be the difference between closing down and getting ahead of the competition. Time is money and a short-term loan can be obtained in as little as one day.

• The business is experiencing a growth period

• If a business is confident that taking on debt will allow it to bring in more revenue and pay back a short-term business loan quickly, then it could be a terrific solution.

• The business is cyclical

• A short-term business loan can bridge cash flow gaps for seasonal companies.

• Short-term operational expenses

• If a business needs to hire extra workers during a holiday season or must obtain a certain piece of equipment to cover an order, then a short-term business loan can get the job completed.

• Cash flow issue

• When a business is low on cash reserves but can depend on money coming in shortly, then it can leverage a short-term business loan to stay afloat and operate as usual.

• Emergency repairs 

• Regardless of how much a business plans ahead, there will always be surprises that arise. Whether it's damage to a business’s office or malfunctioning equipment, a business can obtain cash to cover an emergency.

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Overall, a short-term business loan is a terrific option, especially for new and small businesses that won’t qualify for traditional financing and need cash fast.

There are certain circumstances where companies should avoid using short-term business loans. For instance:

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• A large loan amount is needed

• Short-term business loans tend to come in smaller amounts (< $100,000), so the borrower won’t be saddled with large payments. This will be an issue for a business requiring a lot of debt.

• A low interest rate is desired or needed

• Interest rates for short-term business loans are usually higher than bank loans or term loans. Companies that want to keep their debt at a low interest rate should avoid short-term business loans.

• A short repayment timeline won’t work

• As the name suggests, short-term business loans have a quick repayment timeline and often times require daily or weekly payments. If that won’t work for a business, then it should not take on a short-term business loan.

• Unable to make payments

• If a business has limited cash reserves, then it should take a deep dive into its finances before borrowing. If it doesn’t have the budget to make its payments, then it should avoid bringing on short-term debt.

• Risk of refinancing repeatedly

• Falling behind on repayment of the loan may create a cycle of refinancing to reduce and delay payments. This can initiate a debt trap where payments exceed what the business can cover and each new loan may contain additional fees.

There isn’t a standard process for getting a short-term business loan because it depends on the lender and the type of financing. That said, below are the general steps to follow to obtain a short-term business loan.

‍Determine the business’s borrowing needs

• Before looking for a capital provider, a business should evaluate the reasons it needs a short-term loan. In particular, it should confirm that bringing on debt will improve its efficiency and increase revenue. 
• The business should also figure out if it is better for it to get a line of credit or get a lump sum of cash. The latter may sound great, but the business will need to pay interest on all the provided funds right away even though it might not need all the cash at the beginning of the loan term. 
• After reviewing the business’s borrowing needs, the business should be able to determine the loan amount it needs and confirm what will work with its budget.

Check credit score 

• If the business is established, it should check its business credit score via Experian, Paynet or Dun & Bradstreet. 
• The majority of business loans are personally guaranteed by the business owner, so the business should also check the business owner’s personal credit score. The business owner should have a FICO score of 600 or higher to be eligible for a short-term business loan.

Shop lenders

• Once a business knows what type of short-term debt it wants to obtain and the loan amount it desires, it’s time for it to shop around with lenders. It’s best for the business to run through each lender’s eligibility requirements to see what its chances are of getting approval. It’s also important for the business to read reviews to check if the lender has any red flags.

Gather documentation

• Lenders will require information about a business during the application process, so it’s ideal for the business to get ahead and gather the documentation needed. Here is a list of items a lender will typically want to see:

• Business plan
• Length of time in business
• Credit report(s)
• Business tax returns
• Business owner’s tax returns 
• Projected annual or monthly revenue
• Historical annual and monthly revenue
• Proof of collateral the business will offer if it is applying for a secured business loan
• Business license and/or registrations

Submit an application

• The business should go to the lender’s website to send in a loan application. Most lenders provide online applications, but it may be required to speak to a customer service representative on the phone.

With Lendzero, applying for a business term loan is easy. 

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Step 1: Click on the Get Approved button above and answer a few basic questions about your business. We will inform you about your best options and how many exist (this will set your expectations). 

Step 2: After this is complete, you will be asked to create a username and password to begin your electronic loan application. This process normally takes about 6 – 7 minutes (if you have all your documents easily accessible and ready). 

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To complete the loan application, here is what you will need to have handy:

• Business TAX ID (federal tax id number, aka EIN/FEIN)
• Estimated business revenue and average bank balances
• Social security number for all applicants
• Last 3 months of business bank statements (download the PDF statements from your business bank account)
• Most recent years tax return in PDF format (all pages)

Step 3: Once the application process is complete, we will send you the completed loan application for you to review and sign. Once you have signed for your application, the process is complete. You have officially applied and started your journey to receiving pre-negotiated short term business loan offers. Your Lendzero funding specialist will reach out to you to guide you through the remaining steps of the process, and provide the necessary guidance and support needed with the goal of successfully obtaining the proper loan.