When most people think of business loans, they think of traditional five- or ten-year loans offered by banks, credit unions, or SBA guaranteed loans. When borrowing to meet needs such as buying expensive heavy equipment, expanding to a new location, or building a new warehouse, long-term loans can be a good choice because long-term loans allow borrowers to reduce the amount of regular payments over the course of the loan and better match the production period of the equipment. Still, there are some loan uses, and the long-term terms of most small business loans may not be the best fit. In this case, a short-term business loan may be more suitable.

 

Fortunately for small businesses, their local bank is not the only place to borrow money, there are a variety of loan options available, and short-term loans are available for short-term project financing needs. When should a business consider a short-term business loan? The first question any business should ask before borrowing money is “What is the purpose of the loan?” This will help determine how much they need to borrow, the terms of the loan that make the most sense (short vs. long term), and even what they might want to secure.

 

Depending on the purpose of the loan, some small business borrowers opt for short-term loans to reduce the total dollar cost of the loan. According to a survey commissioned by the Electronic Transactions Association, 57% of small businesses would choose a short-term loan to minimize total fees and expenses in a short-term investment opportunity. Because the APR does not represent the total dollar cost of the loan, this is true even if the APR for short-term loans is higher than for long-term options. The two most specific lending purposes for small businesses that participated in the survey were to purchase equipment (54%) or purchase inventory (51%)—two purchases that tend to be very sensitive to dollar cost. What’s more, these small businesses expect a 5x return on every dollar they borrow, making the total dollar cost of the loan a key consideration for them.

 

Some popular reasons to consider a short-term business loan may include:

  • Project start-up costs: Sometimes adding a new project requires an upfront cost that may exceed the business’s ability to pay with cash flow, but will be recovered within 60 or 90 days when the customer pays their invoice. In this case, the ability to quickly enter and exit financing at a lower total dollar cost may make more sense than multi-year payments on a long-term loan.
  • Eliminate seasonal cash flow gaps: Many seasonal businesses sometimes borrow to meet short-lived cash flow needs, which are the dead time that exists between busy seasons to cover periods of downtime. Doing so requires the business to ensure sufficient cash flow during slow periods, so that larger regular payments are often associated with short-term loans.
  • Buy fast-turning inventory at a discount: A short-term business loan can be a great opportunity to buy inventory at a discount that will turn around quickly and allow the business to make extra profits.
  • Covers emergency repair costs for critical equipment: When equipment needed to run your business breaks down, a short-term small business loan can help get the business running again without the four or more years of loan liability. And, many times, approval rates for short-term business loans can be faster than traditional bank long-term financing – which helps time is of the essence.

 

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