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Short-Term Business Loans – How to Choose the Right One

woman at a desk considering short-term business loans

Short-term business loans, by definition, have loan terms up to 36 months. A short-term business loan could be the answer to your business finance needs. Here are a few of the short-term finance options that could work for you.

Business overdraft

When seeking short-term business loans, a business overdraft could be the right choice if you need working capital. With a business overdraft, you are allowed to withdraw funds from your regular transaction account resulting in a negative balance. You pay fees and interest on the amount overdrawn. An overdraft is ongoing and the term is up to you, so it fits into the short-term finance category.

Business overdrafts usually have a minimum amount of $10,000, but you are only charged interest on what you are using. They are available either secured or unsecured versions, with lower interest rates for secured overdrafts. You will also be charged a regular accounting fee while the business overdraft is open.

One thing to consider is that a business overdraft can be withdrawn by the bank at any time. This means you would have to repay all the money outstanding at once and experience a cash flow crunch. 

Business line of credit

A business line of credit is similar to an overdraft, but a line of credit is not usually linked to your regular transaction account. Like a business overdraft, you only pay for the funds you use and you have some flexibility with paying back the line of credit, so a business line of credit falls into the short-term business loans category.

Unlike a business overdraft, there are stricter lending criteria for a business line of credit, including being in business for a minimum time and having minimum annual revenue. Other requirements can include:

  • Property or equity as security
  • Financial statements
  • An application.

The approval time for a business line of credit can be as short as one to two days if your paperwork is in order. Compared to online lenders, banks have more stringent requirements for lines of credit that online lenders. With a simple online application process, it’s available to qualifying businesses that use Xero accounting. Having a 12-month term, this product falls into the short-term business finance category. Find out more in What is a Business Line of Credit?

Invoice finance to cover short-term finance needs

Invoice finance is one of the short-term business loans that can help businesses that have outstanding invoices. When you use invoice finance, the lender advances part of the total value of outstanding invoices (up to 90%). When the debtor pays the outstanding invoice, the lender pays the remainder of the invoice to the borrower minus an interest charged while waiting for the invoice to be paid. The time waiting for the invoice to be paid is usually short, so invoice finance also falls into the short-term business loans category.

With invoice finance, your invoices act as collateral. This makes invoice finance affordable and one of the simplest types of short-term business loans to get. Invoice finance gives you the advantage of being able to access the value of outstanding invoices immediately to improve cash flow. 

One of the drawbacks is that the fees can be higher with invoice finance than with other short-term funding. If debtors are slow to pay the invoices, you could end up paying large amounts of interest. Invoice finance is not applicable to businesses that don’t issue many invoices but get paid immediately for their products, such as retail shops and restaurants. Learn more about The Pros and Cons of Invoice Finance.

Merchant cash advances

Merchant cash advances usually have terms up to 12 months, so they fall into the short-term business loans category. With a merchant cash advance, the lender provides an advance against future credit card sales of the borrower. Once the advance has been made, it is repaid when customers make credit card or EFTPOS purchases. The lender gets a percentage of the daily revenue before it reaches the borrower’s bank account. This is paid into the lender’s bank account until the advance has been paid back.

The benefits of merchant cash advances include the quick application process and quick receipt of funds. With repayments being a percentage of sales, they are less likely to harm cash flow.

Learn more in What Is a Merchant Cash Advance?

Unsecured short-term business loans

Unsecured short-term loans have been becoming more popular for small businesses needing short-term business funding without going through a tedious application process. Research has shown that banks reject around 74% of business loan applications from small to medium enterprises. This is because banks have stringent regulatory requirements around risk.

The unmet needs of business owners have been met by a growing number of fintechs (financial technology companies) that are able to offer a fast and simple loan process where you apply online for small business loans that meet short-term needs. Rather than working with a relationship manager at a bank, and waiting six to eight weeks for an answer, many online fintech lenders can provide an answer two business days. If approved, funds are transferred into your account within 24 hours. This is an important feature when you need quick access to funds. 

Being unsecured, these short-term business loans don’t require business or personal assets as collateral. Fintech lenders are not bound by stringent regulatory requirements that banks face, so they can offer short-term business finance to SMEs.

Due to the higher risk for lenders, unsecured short-term business loans have higher interest rates than long-term secured loans. However, the higher interest rate might not be an issue when you need funding fast. For example, a business might have an opportunity to purchase inventory at a significant discount for a limited time. 

Learn more about unsecured business loans from Moula.

Choosing from the short-term business finance options available

When considering short-term business finance, it’s a good idea to look at all the loan options available to you. Remember to check the terms and conditions of any funding solutions. Fees and charges can add up quickly, so read the fine print.

Learn more about the business finance options available in The Complete Guide to Business Loans in Australia. If you are interested in getting an estimate for principal and interest repayments, use our business loan calculator


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