Author: Gary Hemming CeMAP CeFA CeRGI CSP
20+ years experience in business loans
A short term loan can be extremely helpful for a business, especially when funding is required to cover short term finance needs. They can be used when faced with an unexpected expense, seasonal fluctuation in trading, paying up front for stock or taking advantage of a business opportunity.
In this ABC deep-dive into short term business loans we investigate the pros and cons of taking out a loan over a relatively short period, and the different types of funding available.
As with any financial commitment, we recommend you seek expert independent advice from a broker regulated by the Financial Conduct Authority.
What is a short-term business loan?
Short term business loan financing is designed for businesses with an immediate need for funds. Typically a short-term loan will range from three to 18 months, although some lenders may offer repayment periods up to two years in duration. Short term loans come in two forms, secured against collateral or unsecured. The latter will only usually be offered at a higher interest rate.
Whilst business loans in the UK are very common there are many types of loans available, and so it’s always important to understand what finance will best suit your needs.
Short term loans can be secured or unsecured.
Unsecured business loans
Unsecured business loans are a type of credit that isn’t based on assets such as property or stock. Lenders will assess the creditworthiness of a business and the likelihood that they will be able to pay back the loan. Unsecured loans are often shorter term arrangements.
This type of loan is considered to be of a higher risk as the lender does not have certainty the payments could be met, or that they will receive their money if the business defaults on the arrangement. Unsecured loans ordinarily have higher interest rates than secured loans.
Secured business loans
Secured business loans are based on assets or ‘collateral’ so the lender will have confidence that monies can be recouped if the business defaults on payments. Often assets such as property or merchandise are used as collateral to secure loans.
Interest rates on secured loans are often lower as there is a guarantee that the lender will get their money back; however, with long term secured loans interest rates can be higher as the prospective lender will be tying up funds over a longer time frame.
How do short-term business loans work?
As with other types of loan the lender will provide a lump sum, whereby the amount of money borrowed is repaid according to the agreed repayment schedule. Although they can be quick to arrange, it is worth remembering that the cost of short-term borrowing is usually significantly higher if it is unsecured. Owing to the relatively short amount of time scheduled to repay the loan, payments may be required on a more frequent basis.
How much can I borrow with a short-term business loan?
Typically a business can borrow up to 25% of its annual turnover, but several factors are taken into consideration when deciding how much a business can borrow. The key areas are the type of loan, the business and the borrower. Secured loans may result in a larger sum being offered than an unsecured loan. The lender is also likely to assess the business’s cash flow, its annual turnover and whether the business is profitable.
Why use a short term business loan?
Short term loans can be helpful to maintain cash flow and help smooth peaks and troughs in income, they are especially useful for maintaining working capital; for example, when awaiting payment for goods or services.
Will my business qualify?
Contact ABC, regulated by the Financial Conduct Authority, for a callback and discussion about your needs. With twenty years of experience in trade finance and a wide panel of lenders, we focus on getting you the right solution for your business.
What can I use the money for?
The money can be used for a variety of reasons, however it is advisable to discuss your requirements with a specialist broker so they can advise on the most suitable financial product. Usually there is no restriction placed on what you can do with a short-term business loan; however, some loans such as a corporation tax loan will have a specific purpose and must be used to pay tax liabilities.
Advantages and Disadvantages
While each individual lender will have its own terms and conditions, there are some general advantages to note when seeking a short-term loan. They can be quick to arrange, often within 24 hours, and require minimal paperwork. A short-term loan may be made available even in the event of the applicant having poor credit history.
In some situations there are draw-backs to taking a short-term loan to raise funds. Higher interest rates can be levied if a loan is unsecured and early repayment fees may be charged if the loan is repaid early.
What are the different types of short-term lending for businesses?
There are various types of short-term funding available to businesses.
Bridging loans
Bridging loans also known as commercial bridging loans, are available to businesses of all sizes requiring speedy access to funds.
These loans can assist in plugging a gap in a business’ finances, typically the time between an outgoing payment being due and a source of income being made available to cover the payment.
Business loans
High-street banks and independent lenders offer business loans, where the funds borrowed must be used for business purposes. For example, financing expansion of the business or starting a new business. Business loans can be secured; for example, against commercial property or unsecured where no collateral is provided.
Business line of credit
Another option is a business line of credit, a flexible loan allowing businesses to access funds either as a lump sum or in instalments until the total loan amount is used up. Access to a line of credit may require the borrower to use assets as security on the loan.
Invoice finance
This is an arrangement where some or all unpaid invoices are sold to a third party financier. The financier immediately pays for the invoices and the debt then transfers to them. Invoice financing can help a business maintain cash flow if payments are outstanding for a long time and money is required urgently.
Commonly arranged online, equity crowdfunding is a short-term method that collects small investments from numerous small investors and consolidates them into a larger single loan that can be used to finance a project or business. This is usually done through crowdfunding platforms.
Revolving credit facility
A revolving credit facility is a flexible source of funding deposited directly to a business’s bank account that allows businesses to withdraw credit when required to pay for business activities. When the sum borrowed has been repaid in accordance with the terms and conditions of the agreement with the lender, the finance can be used again as and when the business requires.
Revolving credit is usually available for short periods of three months to two years, with a fixed interest rate. In certain circumstances a business may be given the option to extend the agreement if all repayments are made on time and the lender’s eligibility criteria are met. Repayments are generally required on a daily, weekly, or monthly basis.
Business overdraft
A business overdraft is short-term cash injection to a business bank account. If approved by your lender, the required overdraft limit can be increased or decreased to suit your business needs. Business overdrafts differ from a loan in that interest is only charged on the amount by which the business is overdrawn. The overdraft can be repaid as your income allows, but it is worth remembering that your bank may demand repayment at any time. The lender may also charge a fee for the overdraft.
Line of credit
This is a flexible arrangement, similar to a credit card, where a business can borrow varying amounts according to its needs. Collateral may be needed in order to secure a line of credit.
Business credit cards
A business credit card plays a pivotal role in managing a company’s finances, and is specifically for corporate use. They are available to businesses of varying sizes, and can be used to effectively differentiate personal expenditures from business-related costs.
Although business credit cards operate similarly to regular credit cards, there are some notable differences. The most notable difference is that the borrowing limit on a business credit card is generally higher than a standard credit card, as it is based on personal income combined with the business’s revenue.
One further benefit of using a business credit card is that if repayments are made on time this can have a positive impact on the business’s credit rating.
Fast business loans
A fast business loan is for businesses that require fast access to funds in the form of either a lump sum or a business line of credit. The application process is done with an online lender specialising in fast applications and funding approvals. This form of borrowing can receive approval quickly, with the required capital made available in one to three days.
A fast loan can be secured or unsecured, but if you take a secured loan providing assets as collateral they could be seized if your business falls behind on its payments.
Some lenders may also require you to sign a personal guarantee, meaning you agree to accept personal liability for the debt if your company fails to make its payments.
A Merchant Cash Advance (MCA)
A Merchant Cash Advance (MCA) is a form of credit, however it is only available to businesses that accept debit and credit card payments. Finance is provided in exchange for a percentage of credit and debit card sales revenue. It should be noted that there may also be additional fees to pay when entering into an MCA agreement.
This form of loan can be helpful for small businesses that do not have significant assets that could be used as collateral for a loan.
Is a long term loan better than short-term finance?
The main advantage of a longer term loan is that often a larger amount of credit can be raised. A lender will have more certainty they will be paid when a loan is secured against assets.
Payments can be set over a long term, potentially resulting in a manageable payment schedule with lower monthly payments than a short-term loan. It should be noted that paying back a loan over a longer term will result in more interest being accrued on the original amount.
Disadvantages of long term business loans are that you will often be tied into a fixed arrangement and, if interest rates drop or your circumstances change you will not have the flexibility to change the arrangement.
In some cases you may be able to repay a loan earlier, however, this often comes with an early repayment fee. Your broker will look carefully at your requirements before taking a longer term loan, especially if flexibility is important to you.
With a secured long term loan interest rates are likely to be higher as both parties are tied into a lengthy agreement where external factors could change.
As with all loans, there will be penalties for a default and this may impact your creditworthiness.
How do I choose the right short-term loan for my business?
There are several steps to take before you apply for a loan. Firstly, your business will need to be registered in the United Kingdom and you will need to provide paperwork such as bank statements and tax returns to demonstrate income. Before applying for a loan you will also need to prepare a business plan showing what the loan is for. For example, you may wish to expand your business and need capital to do so.
Once you have decided how much you need and what the funding is for then you will need to compare financial products and lenders. It is advisable to use a specialist broker to ensure you understand the types of financial products available and what will be most suitable for your needs.
A range of documents are needed to apply for a long term business loan, although requirements may differ between lenders in most instances you will need to provide the following:
- Proof of company incorporation.
- Bank statements.
- VAT returns.
- Inventories.
- Business plans.
Frequently Asked Questions
This is very much dependent on the terms and conditions of the loan product you have chosen, but in certain instances funds will be available to you within 24 hours.
Whilst good credit is always helpful, a poor credit rating is not necessarily a barrier to receiving a short-term loan. It is important to work with a specialist lender who understands this type of finance and who will look at your current situation to assess what will work for your business.
The interest rates on loans may be higher for businesses with bad credit. Comparing lenders by using a specialist broker is recommended to ensure you get the best financial package for your business.
A short-term loan can be repaid early, but it is worth noting that a lender may charge an early repayment fee. It is advisable to let your broker know if you would like the flexibility to repay your loan early as fees for early repayment will vary.
The rate of interest payable is very much dependent on the type of loan you select, the amount you borrow and how quickly you intend to repay the lender.
To find the product most suitable for your business needs we recommend you seek expert independent advice from a broker regulated by the Financial Conduct Authority. Contact ABC regulated by the Financial Conduct Authority for a callback and discussion about your requirements. With twenty years of experience in trade finance and a wide panel of lenders, we focus on getting you the right solution for your business.
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