The 2023 Report on Employer Firms from the 2022 Small Business Credit Survey found that 94% of businesses had a financial issue in the past year. Financial issues like uneven cash flow, operating expenses, and rising product and service costs are common reasons for short-term business loans.
Short-term loans have three to 18-month repayment terms, so they must be managed wisely. You could default on your loan or fall into debt, causing more financial hardship.
Short-term business loan types
The best short-term business loans have 12-month repayment terms and can quickly meet your business’s needs. Exploring your options ensures you get the right business short-term loan. Popular short-term business loans include these.
- Term loan. A lump-sum loan. You repay the loan over several months and pay interest on the full amount.
- Credit line. A credit line that rolls over. Borrow up to your credit limit and pay it back monthly. You only pay interest on current debt. You are covering emergency expenses and seasonal sales slumps with cash flow.
- Merchant cash advance. A company that lends you money using credit card sales as collateral. To repay the loan, use future sales—emergency, seasonal, and inventory purchases.
- Invoice factoring. Receives up to 90% of an unpaid invoice from an invoice factoring company. Once the invoice is paid, you get the balance minus fees. You are working capital to pay bills without waiting for invoices.
5 Strategies for Managing a Short-Term Business Loan
You may prevent future financial issues by adhering to these five recommendations, which apply to any short-term company loan.
1. Know your loan terms.
The loan’s terms set the interest rate, repayment schedule, and prepayment policies. They also state your loan’s due date and the consequences of late payment.
Does your loan have a factor rate or interest? Can you increase principal payments? Choosing the right short term business loans can boost your credit score and grow your business, but not understanding the terms could hurt it.
2. Budget to cover loan payments
Borrowing less money is usually the better option, even though it can be tempting to borrow as much as a lender will allow. Especially when you factor in all the costs associated with the loan for which you are responsible. Short-term loans best serve companies with immediate cash flow needs.
Fees like application, origination, underwriting, late, and administration are typically applied to a loan. To make sure you can afford the monthly payments on a business loan, use a loan calculator to figure out what they will be. Once you’ve finalized the terms of your loan and know how much you’ll be required to pay each month, you can allocate the necessary funds accordingly.
3. Follow your repayment plan.
On-time payments makeup 35% of your personal FICO score and can affect your business score. Short-term business loans are easier to get into debt if you miss payments. Missing payments can also cause loan default, hurting your business.
On-time payments are the most crucial part of responsible short-term loan management.
4. Avoid new debt.
Short-term loans can help your business during seasonal downturns or emergencies. Taking on other debts while repaying a short-term loan can make payments difficult.
Consider short-term business loans or other financing options before taking on new debt if your business needs more funding during repayment.
5. Communicate with your lender.
Communicating with lenders is crucial. Always contact us with loan questions. Contact them if you don’t understand an extra fee or can’t pay because your business is struggling.
If you voice your concerns early, your lender may be more willing to help.
Establishing a budget, understanding your loan terms, communicating with your lender, and making on-time payments can help you manage your short-term loan.