Businesses often face a variety of challenges. One of the major ones is funding new projects, satisfying payrolls, making investments, and more. Fortunately, there is a lending product designed to meet these business-specific needs.
What Is A Short-Term Business Loan?
A short-term business loan is a loan given to a business with a maturity of one year or less. Businesses may use funds to cater to temporary cash-flow deficiencies or handle pressing obligations like paying suppliers. Businesses often borrow via short-term loans to meet more urgent financial needs when they arise.
For instance, short-term business loans are commonly sought by seasonal businesses that require inventory financing before the beginning of the holiday season.
Raising capital to satisfy expenses or projects is another major reason a business may require a short-term loan. But, before examining if a short-term loan is appropriate, it’s critical to understand if you qualify.
What Can Short-Term Business Loan Funds Be Used For?
These loans address your need for immediate capital. Loan funds can be used for:
- Project startup. You know that your great idea is going to result in rapid revenue. Therefore, you just need the money to get going
- To purchase inventory for the upcoming holiday or season
- Make payroll when unexpected emergencies have used up your working capital
- Replace or repair equipment
- Bridge a seasonal cash flow gap
- Purchase inventory in bulk or at a temporary sale price
Qualifying for a Short-Term Business Loan
When applying for short-term loans, whether from banks, credit unions, or other lenders, it is important to have the documentation handy to help lenders build an accurate profile. Lenders will typically require a payment history record, income statement, the cash flow history for the last 3-5 years, as well as a credit score.
Personal Credit Scoring
The credit score is an important component for judging the creditworthiness of the borrower. Borrowers with excellent credit scores will ultimately find it easier to secure short-term business loans at the most competitive rates.
Knowing where you stand on the credit spectrum can help determine rates, but also the suitability of a short-term business loan.
- 750+: Given this is a prime score, many lenders will offer a loan for scores of 750 or above. Accordingly, borrowers can access SBA, business lines of credit, and traditional bank loans.
- 700+: A credit score of between 700 and 749 will still qualify the borrower for some of the best short-term rates in the market including SBA loans and bank loans.
- 640+: Lenders consider this credit score good but not excellent. The borrower may be able to get a short-term business loan, but it will be much more difficult or possibly feature higher rates.
- 600+: Many banks will not offer loans with a score of less than 640. However, certain non-bank lenders will offer financing at a higher interest rate or in exchange for collateralizing the loan.
Business Credit Scoring
If you have already been in business for some time and would like to take a loan out for the business, it is a good idea to also understand how business credit scoring works. While personal credit scores range from 0 to 850, business credit scores from Dun & Bradstreet, Experian, and Equifax range from 0 to 100.
The way to acquire and maintain a good credit score for a business is very similar to maintaining a good personal credit rating. Borrowing responsibly, paying bills on time, and not incurring too much debt will generally boost credit scores. The one key difference is that being in legal trouble frequently can hurt a business’s credit rating.
Many businesses find themselves in need of financing at critical times. Luckily, a short-term business loan can provide the necessary financial relief given good borrowing criteria. Correspondingly, to access the best short-term loans, ensure you have a high credit score and strong performance before applying.
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