What happens when your business needs money right away? A term loan may be a great option, except it often takes too long to process. If you have an immediate need for funds, you need a short-term loan, which combines the benefits of a typical term loan, but gets you the funds you need a lot faster.
The Specifics of Short-Term Loans
Because of the speed, you are able to secure a short-term loan, you may only be able to borrow a small amount. Businesses can usually borrow up to $500,000 and have to pay the balance off in a few years. The flip side to the lower amount and shorter term, however, is the ability to have funds in your hands in as short as one business day.
Depending on the lender you choose, you may pay interest rates of 8% or higher. The riskiness your business poses and the bank’s ability to fund a loan in that short amount of time determines the rate. Because of the speed at which banks underwrite these loans, you don’t have to meet a lot of underwriting requirements.
In general, you may need:
- A credit score of at least 500
- Be in business for at least a year
- Have an active business checking account
What Lenders Look For
As we discussed above, lenders look closely at your credit score. That three digit number tells them a lot about your ability to repay the loan. Lenders put a lot of stock in that number, but they also look at other factors when deciding if you’re a good candidate for a short-term loan.
What’s your credit utilization rate?
Even though you’re applying for a business loan, lenders still look at you personally. They may look at your personal credit score and they’ll also look at your utilization rate or the amount of debt you have outstanding compared to your credit lines. They want to see that you don’t have a large amount of your available credit outstanding at one time. If you do, it’s a sign of risk that they may not want to take on.
How much business debt do you have?
Because this is a business loan, it makes sense that lenders will look at your business debt. They want to know if the amount of debt you have outstanding is normal for the industry or if you have an excessive amount.
How’s your business doing?
Lenders compare your business’s revenue to the trends in the industry. Are you on par or are your sales much lower than the average business in your industry? Also, how well do you pay your debts? If you don’t pay them on time, it may signify that your business is in trouble. If your business is in trouble, lenders will be choosy about giving you a loan.
Can you make the payments?
If your business can’t cover the payments due to unforeseen circumstances, lenders want to know if you can cover them personally. They may take a closer look than you anticipated at your personal finances to use as a backup.
Increasing Your Chances of Approval
Loan applications get rejected every day. If you become one of them, don’t think it’s the end of the road. Each lender has different requirements. You may have stumbled across a lender that wants something you can’t provide, but that doesn’t mean another lender down the street or online doesn’t have another program for you.
If you do get rejected, find out the reason. It may be personal, business or both. Knowing the reasons can help you fix the issue and try again.
Whether it’s your personal or business credit score, try the following:
Get your bills up-to-date
Any late payments can bring your score down dramatically Pay your debts down – If you have too much outstanding debt compared to your available credit, it can drag your score down
Don’t apply for new credit
Every time you apply for new credit it hurts your credit score and makes lenders leery of giving you a loan as it makes you look desperate for funds
Don’t close old accounts
Your credit age should be ‘old’ in order for lenders to see your long-standing credit history and make a decision
Check your credit reports periodically and make sure all information reporting belongs to you and is properly reported
Reasons to Get a Short-Term Business Loan
Short-term business loans are great for many needs, but the most lucrative is to buy business machinery. Because most machinery doesn’t have a very long life, many businesses find themselves paying for equipment they no longer own because the loan’s term was so much longer than the machine’s life.
In addition to buying machines, short-term business loans are good for:
- Increase cash flow immediately
- Expand their staff
- Take advantage of a bulk inventory opportunity
- Deal with unexpected repairs
- Pay for unexpected expenses
- Take advantage of an immediate business opportunity
Before you take a short-term business loan, consider the full cost, though. Because rates are often higher on short-term loans rather than longer term loans because of the risk, you may overpay for the funds. If it’s something that can wait until you get approval on a longer term loan, it may be worth it.
The Cost of Short-Term Business Loans
Before you choose a short-term business loan, you must be able to look at the cost. Each lender will have different fees and some may even have hidden fees.
As you shop around for the right loan consider:
- Look at how much you’ll pay in interest and loan fees for each dollar you borrow
- Determine the loan’s average monthly payment
- Look at the loan’s APR or Annual Percentage Rate which takes into consideration the interest cost and loan fees over the course of the term and measures it per year
- Total up the interest and fees for the life of the loan
Because each lender shows their costs differently, it pays to use a tool that can help you with these metrics. The Innovative Lending Platform Association offers a SMART tool that helps you compare loans based on equivalent factors.
How to Get a Short-Term Loan
Once you’ve made your decision, it’s time to apply for a short-term loan. Don’t rush into your decision, though. Even though you may be in a rush to get the money, you want to choose the loan with the most attractive terms. You should also make sure you know all terms including any hidden fees.
While each lender differs in their requirements, you will fill out an application with each lender and then need to provide the basic documentation that shows your company’s worth. A few of the most common documents needed include:
- Your personal resume that details your work and education experience
- Your personal and business credit reports
- Proof of your ability to do business with business licenses and permits
- Your personal and business tax returns for the last two years
- Business documents including your business plan, Profit & Loss Statement, Balance Sheets, and asset statements
- Personal asset statements for the last year
- Business asset statements for the last year
- Proof of any collateral you need to put up
- Any documents pertaining to your business structure, especially if you are a corporation or LLC
The best thing you can do is prepare yourself for a short-term loan application. Even though you need the money fast, it pays to take your time and look over your credentials. Is your personal and business credit score in good shape? Are your debts under control? Do you have a solid business history and show promise for the future?
These are all things lenders look at when deciding if you’re a good risk. Before you apply for a short-term loan, prepare your documents as best as possible, looking for any areas that may cause lenders concern. Have explanations and compensating factors for any risk factors to ensure that you get the loan you need.