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How can a short-term business loan help you?

There are scenarios where your business will have a relatively small funding need. In such circumstances, you won’t want to take out a larger loan that strains your cash flow or commits you to a long-term solution that has lasting ramifications for your company.

At times like these, a short-term loan is beneficial. They are invaluable for filling temporary funding gaps in your operations.

Smiling owner at door of her restaurant business

Our guide explores short-term loans in greater detail, including why they’re helpful for your business and how to secure one.

What is a short-term loan?

A short-term loan is typically classed as a loan lasting between three months to a couple of years. You will make regular repayments to clear the balance (plus interest) in this timeframe.

They tend to offer smaller amounts of funding than a long-term loan. However, it may still offer between £1000 and £1 million, depending on the strength of your business and application.

Short-term loans are available from many lenders, such as banks and alternative providers.

There are also a different forms of short-term debt funding, including:

Each type has different criteria you will need to meet and purposes, so explore these before you choose your route.

When does a short-term loan prove useful?

As previously mentioned, short-term loans are most helpful if you are experiencing a short-term funding gap.

Examples of such instances might be:

As you have seen, it is still possible to access larger sums. These might be used towards significant financial needs, including fuelling growth or development.

They may also be pooled together with other sources of funding.

The advantages

Many benefits are associated with short-term loans. We’ve listed the three prominent rewards below.

  1. You pay interest for less time

Short-term loans only last for a maximum of a couple of years, so you will only have to pay interest for this time. It means you pay less interest overall, lowering the overall cost of borrowing.

Most short term loans are also set at fixed interest rates which will vary based on your credit and financial history.

  1. A quicker release of capital

As the loan is short-term, it tends to offer a quicker cash release as the sums involved are lower. The application and approval process are reduced, meaning you will not have to wait too long to receive a decision about the funding.

It is ideal if you have an urgent need for funding.

Consideration

Alongside the rewards, the following factors must be considered before pursuing a short-term loan.

  1. Paying it off

Although many people will be attracted to the length of a short-term loan, payments may be higher to account for the shorter timeframe.

You must be confident you will clear the balance per the agreed repayment schedule. If not, you risk entering further debt which has lasting consequences.

  1. Higher interest rates

Some short-term loans have high-interest rates. Although you pay interest for less time, high-interest rates will make the total cost of borrowing considerably more.

It is worth reviewing the interest rate across lenders to find the most competitive deal for your business. Features like security or a personal guarantee may also reduce the risk to the lender and bring down interest rates.

  1. Fees

Most loans will have fees associated with them, including administrative and processing fees. Review these charges before committing, as they will factor into your affordability.

There may be costs associated with early repayment of the loan. If you want this option, check if fees apply and at what level.

How to secure a short-term loan

If you want a short-term loan, there are a few tips to improve your chances of finding the right solution for your business.

  1. Know how much you need

The first step to identifying the perfect loan is understanding how much you need.

Once you understand your goals for the funding, you will be able to calculate the costs you need to cover. Remember to account for any internal reserves or other funding you will use.

When you have estimated a figure of how much you want to raise, it will become easier to refine the options and find a lender willing to give you the correct amount.

  1. Research lenders

Different lenders have respective criteria that they will look for in a business. You need to find one that suits you.

There are many factors to consider when finding competitive deals, including:

Remember your requirements at all points, as this will help you to find a match.

  1. Understand the criteria

Once you have found a lender you want to work with, it is crucial to understand their criteria.

Even short-term loans may have specific documentation you need to provide (usually relating to bank statements and trading history) or assets and personal guarantees required to secure the loan.

You must ensure you will fulfil their criteria as it will affect your chances of getting approved and the terms you receive.

  1. Optimise your application

Once you understand the lender’s criteria, you should be in an excellent position to optimise your application. The strength of your application will be integral to your success, so spend time getting it right.

Your application should positively reflect your business and need for funding. You also need to be honest to ensure the financing you receive is right for you and won’t harm you financially.

Pegasus Funding will support you in securing a loan for your business. We have a network of lenders offering various funding types, including short and long-term options.

Discuss your needs with our team, and we will identify the ideal solution before guiding you through the application process to maximise your chances of success.

Contact us today.

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