When deciding what kind of loan your business needs, there are a few factors to consider. One of the most pressing would be to decide how long you need the loan for. If you’re here to find the best short term lenders, then you’ve already decided that you only need funds for a lesser duration.
But what actually makes a short term lender the “best”? Today we’re going to cover that and more as we dive into finding the perfect short loan option.
Before we dive into this, it is important to mention that debt isn’t something to take on lightly. Financial experts who discuss using debt for business aren’t going to give the same advice to the private sector. Debt should generally be avoided by individuals, but debt can be highly valuable in the commercial sector. (Debt is used to increase yearly revenue for companies around the world)
Using debt for business should always start with you understanding your risk tolerance. Make sure you are consulting professional financial advice or at least complete relative business training.
Let’s get into this.
How To Find The Best Short Term Lenders
If you’ve followed our series of posts, then you’ll know that we’ve covered how to find the best SBA lender, and the best merchant cash advance lender. Today, however, we are covering the best short terms lenders, plural.That is because there are multiple types of short term loans available to businesses today.
To find the best short term lenders, you need to determine the following:
- Is your current revenue high enough to substantiate standard loan options? Or do you need to use unconventional loan types?
- How much do you need? Many companies have a maximum they are willing to loan out.
- Sometimes your location can actually influence what loans you can qualify for. (Especially where laws exist regarding particular lending practices)
- How important is communication between you and the lender? Many companies don’t have 24/7 customer service.
- How fast do you need the loan? Short term loans can consume just as much time as long term loans. The difference lies in what company you use.
- A number of companies now require an “origination fee” to create a loan. It is important to understand what that could cost and whether you don’t mind it.
- There can be daily or weekly payments due for the short term loan repayment. This varies according to the lending option and company used.
- Does your lender charge prepayment penalties?
- Your amount loaned could be a percentage of your annual revenue. (This is becoming more common due to lenders preferring companies with ongoing sales. It is more likely a company with sales will repay the loan)
- How long have you been in business? Some companies require that you be in operation for a minimum of 2 years.
There are other factors to consider (like whether the lender has physical branches) but the above listed are fairly common.
Why Should You Get A Short Term Loan?
The purpose of a short term loan is usually the same as a long-term loan, the difference lies in how quickly you need funding. A short term loan becomes preferable when you want funding quickly and don’t want to wait to pay it back as long. Essentially, you are taking money quickly and repaying it quickly. There are high minimum requirements for these loans specifically because not as much interest is owed, and the loan is issued quickly.
Of course, this comes at the cost of higher interest because the lender doesn’t have the chance to accrue interest as long. (The best short term lenders are going to be more flexible on the interest rates and agreements)
Many companies use short-term loans for the following:
- Covering expenses
- Order fulfillment
- And more.
Note: Some companies will not lend to you if you intend to use the loan in unacceptable ways. Determine with the lender what they do and don’t allow.
Why Not Use Long-Term Loans?
Long term loans are better for projects that have heftier costs. For instance, when purchasing a new office location, ordering massive stock, or simply expanding operations with new business systems can all be good instances for a long-term loan.
Another reason long-term loans aren’t preferred for smaller purchases is because of the interest accrued. Many long-term loans will have lower interest rates, but that may still cost you more in the long run.
For instance, a loan that has a 10% interest rate on a loan of $10,000 is going not going to play out the same as a 20% loan on $5000 because of the term duration.
If a long-term loan with 10% interest on $10,000 has a 3 year term, 10% of $10,000 is $1000, times each year. (Which would be $3000 in interest due after 3 years plus the initial loan of $10,000)
If a short-term loan has 20% interest on $5000 and has a 1 year loan term, then you are going to pay 20% of $5000 (which would be $1000) in addition to the initial loan of $5000.
So as you can see, the interest rate must also be considered alongside the loan term. Otherwise you could mistake a lower interest for less total interest due.
Are Loans Still Being Issued Despite The Economy Being Bad?
When economies collapse, banks and lending institutions are less likely to issue a loan. Mostly because businesses can’t qualify for one.
That being said, many lenders are more than willing to provide companies with capital. It is important to look at funding like the stock market. There is risk involved when a company lends money, but they negate that risk by evaluating your business’ qualifications and history.
If you have a history of success and longevity, you are going to better qualify for a loan, even if you have a lower credit score.
The industry your business is in will also determine your eligibility. If you are in an industry that just collapsed, it will be harder to get a loan. If your industry is booming, there is quantifiable proof that your business is likely to expand, not shrink.
Growth is the opposite of failure, and that growth is attractive to lenders.
What Kinds Of Short Term Loans Are Available? What Determines The Best Short Term Lenders In Today’s Market?
The most prevalent short term loans currently are “Merchant Cash Advance”, “Traditional Term Loans”, “Invoice Factoring”, and a “Business Line Of Credit”.
They are all inherently a form of a loan, but they loan money differently. While a traditional term loan is easily the most understood (borrow money, pay it back with interest and principle) it is not the most appealing to many companies.
This is because a traditional loan requires higher credit scores, better company history, and is harder to be approved for. The best short term lenders for your business will give you flexible options.
When a company doesn’t meet the minimums for a traditional term loan, Merchant Cash Advance is likely the most common loan option they’ll turn to.
As long as a company has credit card sales to leverage, they can generally be approved for MCA.
Invoice Factoring allows a lender to receive a percentage of your unpaid invoices, while they give you a portion of it now. (Basically selling sales partially)
A Business Line Of Credit both work off the idea of “credit”. This could be a credit card or an online line of funds whereby a company can take what they need, pay it back, and continue to use that line of funds repeatedly. This can prove costly, however, because as anyone will tell you, interest rates on credit cards are generally pretty high.
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