What to Know About Short-Term Business Loans

By Janet Siroto · December 19, 2023 · 4 minute read

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What to Know About Short-Term Business Loans

Owning a small business can mean keeping a lot of plates spinning, including making sure the cash is flowing during fluctuations in income and sales.

You may need to buy more materials, pay additional workers, improve your physical location (say, something breaks), and deal with other expenses. And, because you are a small business, it may all be on you to manage this.

At times, you may need a little outside help to cover costs. You may know about long-term business loans, which can be used for borrowing large sums and take many years to pay off, but how about short-term business loans? Here, you’ll learn more about them, their pros and cons, and whether they might be right for you.

What Is a Short-Term Small Business Loan?

A short-term small business loan is a loan that is designed to help small businesses maintain cash flow and cover small expenses. Because they are meant to be paid off on a shorter timeline (usually within three to 24 months) than long-term loans, they tend to have higher interest rates and can be secured very quickly. Basically, they can get you cash fast.

💡 Quick Tip: Need help covering the cost of a wedding, honeymoon, or new baby? A SoFi personal loan can help you fund major life events — without the high interest rates of credit cards.

What Can You Use a Short-Term Business Loan for?

There are several common uses for short-term loans. A popular one is to cover project start-up costs. If your business is launching a new product or service, a short-term loan can help you avoid disrupting your business’s cash flow.

They can also help bridge cash flow gaps related to uneven sales or seasonal effects, cover emergency repairs, and purchase discounted inventory that you’re confident will sell fast and at a profit.

A short-term loan can also help small businesses take advantage of unexpected growth opportunities by giving them the capital they need to keep production running in a short time period.

Recommended: What Are Financial Hardship Loans?

What Are the Drawbacks of Short-Term Business Loans?

In addition to high interest rates, short-term loans often require frequent repayments. Instead of the customary monthly payments that come with a lot of loans, short-term business loans often require weekly, and in some cases daily, repayments. While these payments tend to be small, they can be difficult to manage, particularly if your business has uneven sales or a lower cash-flow.

There’s also a risk of accumulating debt when using short-term business loans. Because they can be so easy to get (note: there are still eligibility requirements for these types of loans), using them could potentially lead to a business owner relying on this type of small business debt financing.

This could lead to a debt trap where someone would continue rolling over their short-term debt instead of paying it off on the predetermined repayment timeline. Ultimately, rolling over the debt means the business owner would accrue significant interest if they weren’t able to pay the short-term business loan within the initial term.

Recommended: Typical Small Business Loan Fees

What Alternative Financing Options Are Available?

There are a number of alternative financing options when you need cash for your company.

•   A business credit card is another way to cover small expenses that you plan to pay back quickly. On the flip side, business credit cards can come with high interest rates. And credit card debt is considered “revolving,” which involves borrowing against a credit limit, as opposed to paying off your debt on a defined term.

•   Short-term lines of credit can help you manage day-to-day cash flow, too. Lines of credit can help provide flexibility for business owners. You can borrow up to a set amount of money but are only required to pay interest on the actual amount of money that you borrow.

You can then borrow and repay the funds on a payment schedule similar to how a credit card. Similar to credit cards, this is considered a “revolving debt.” Short-term lines of credit may come with maintenance fees. And the interest rate could go up if you fail to pay on time.

There are many financing options available to help pay for your business expenses. Short-term business loans can help you get the cash you need for your business quickly, and pay it off on the predetermined schedule, or add additional payments as your cash flow picks back up again.

Recommended: Business vs. Personal Loan: Which Is Right for You?

About SoFi Personal Loans

While you cannot use a personal loan for business expenses, there may be times in your life that a personal loan is appropriate; say, if you want to consolidate your credit card debt (which could free up funds for your small business). In those situations, see what SoFi offers.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.

SoFi’s Personal Loan was named NerdWallet’s 2024 winner for Best Personal Loan overall.

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