There was a time not too many years ago when the local bank was the only place to get a small business loan. For a number of reasons, that isn’t always the case today. In fact, loan purpose, credit profile, and other factors play an important role in determining where a small business owner should look for financing, the type of small business loan that makes the most sense, and what type of interest rate and other fees are reasonable. Business owners today have the choice between traditional longer term loans, lines of credit, or even short-term financing.
A business owner looking for capital to buy a new warehouse or heavy piece of equipment has very different financing needs than another business owner looking for a loan to purchase inventory or overcome a short-term cash flow hiccup. You can think of it the same way you would consider a home mortgage and an auto loan. Regardless of how ridiculously low the payment would be on a 15- or 30-year auto loan, the interest accrued over the course of the loan would make the automobile prohibitively expensive. What you need the loan for will help you make that determination for your business.
Read on to learn more about what short-term financing is, as well as when it may make more sense than the traditional longer term business loan.
What is short-term business financing?
Short-term business financing includes financing with terms less than 24 months. Traditional lenders, such as banks, do not typically offer short-term small business loans. Online lenders, like OnDeck, offer short-term loans and lines of credit to meet a variety of small business use cases.
What is a good use for a short-term loan?
While many people think of a four-, five-, or 10-year term loan when they think of small business financing, a traditional long-term loan isn’t the best way to finance every business need. Here are examples of four things that might be better suited to a short-term loan:
- Project start-up costs: There are times when ramping up a new project requires upfront costs that might exceed a business’ ability to cover with cash flow, but will be recouped in 60 or 90 days. In that case, a short-term loan might be a better fit.
- Overcoming a short-term seasonal cash flow need: Many seasonal businesses sometimes require an additional influx of capital to meet expenses during the downtime.
- An opportunity to purchase inventory at a discount: A short-term loan could be a good option for purchasing inventory that has the potential to quickly create increased profit.
- Emergency repairs of critical equipment: When equipment necessary to the operation of your business breaks down, a short-term small business loan can help get operations moving again without a four-year or longer loan obligation.
Purchasing equipment or any business expenditure that can be amortized over several years may not always be a good way to use short-term financing, however a short-term loan can be a great tool that allows you to take advantage of unexpected opportunities.
There are more financing options available to small business owners today than ever before—but knowing which makes sense isn’t always obvious. For example, while the total cost of short-term loan will likely be lower, the interest rate could be higher than a traditional long-term loan. Considering your loan purpose before you start looking for a loan is the first step to determining what type of loan makes the most sense for you and your business.
Accessing capital is a big challenge for many small business owners and today’s world of small business lending requires you to become savvier about your options so you can match the need with the right loan.