The Bionic guide to short term business loans

Les Roberts, Senior Content Manager at Bionic
By Les Roberts, Senior Content Manager

Whether you are a startup business or a long-running company, it is likely that you will need some form of business financing at various stages as you grow and develop.

Different types of financing suit different business needs. Commercial mortgages or long term business loans, for example, can provide your business with money for it to develop gradually over several years. 

Let's take a closer look at short term business loans - a type of funding that is quick to arrange can be used for more immediate needs.

What are short term business loans?

Short term business loans are a type of financing for your small business in which the money borrowed needs to be paid back in full over just a handful of months. Short term loans in the UK are typically available for between three and 12 months, but some lenders offer business loans that are repayable in just one month.

Typical short term commercial loan rates vary significantly from lender to lender but they are likely to be higher than longer-term forms of financing. That’s why short term business funding is only really suitable for certain types of businesses in certain circumstances.

For example, short term loans may not be right for a startup business that needs money to invest in stock or development over a long timescale. But they may suit an established business that needs to address an interruption in cash flow or a one-off cost.

What can a short term business loan be used for?

As with most business borrowing, short term commercial loans can be used for anything. But that doesn’t mean they are the best type of financing option for any investment your business wants to make.

These kinds of loans for small businesses work best if they are seen as a short term cash injection to help overcome sudden cash flow problems or to help you take advantage of an unexpected investment opportunity.

How long are small business loan terms?

Small business loans can be taken out over a number of different timescales. Typically, small business short term loans are repaid over three to 12 months, though they can be even shorter than that in some instances.

A medium-term loan will tend to have a ‘term’ of up to five years, while long term small business loans can be repaid over as long a period as 15 years.

What are the advantages of a short term business loan?

There are a number of advantages that short term loans have over other types of business finance, including:

  • Any purpose - Unlike finance options like commercial mortgages, many short term loans can be used for anything your business needs, from cash flow to new equipment.
  • Speed of lending - Short term loans can offer a way to get cash into your business relatively quickly. Small businesses can use short term loans to move fast, such as when they need to pay for an unexpected cost or to get through times when cash flow is inconsistent.

The speed associated with short term financing is one of its main advantages. Arranging a quick small business loan means you can access the funds sometimes within days. Small business loans can involve nearly instant approval; some lenders offer ‘instant business loans’ or ‘same day business loans’ if you meet their lending criteria. 

But make sure you explore your options, as the interest rates can vary greatly depending upon the lender and your current circumstances.

What are the disadvantages of a short term business loan?

Before you apply for a short term business loan, you need to consider the following downsides:

  • Higher monthly repayments - Small business loans normally require higher monthly repayments when you borrow the money over a shorter period. Although you may pay less interest overall, because there are fewer monthly payments, each is likely to be higher. Make sure you can make these payments before considering a short term loan for your business.
  • Higher interest rates - Short term loans will normally have higher interest rates. Why do short term loans have higher interest rates? Because this means a lender can still make money from the loans even if you default. The higher interest rate acts as a kind of guarantee for your bank or lender.

What do you need to consider when running a short term loan comparison?

Running a short term loan comparison may be fairly straightforward, but be careful not to be caught out by hidden charges.

A number of price comparison sites will list the APR (annual percentage rate) offered by lenders, along with the maximum and minimum amount you can borrow and the loan terms available. But these can often be a crude and inaccurate way to calculate how much a loan will cost you. There are often hidden charges for arranging loans, and stringent charges for early repayment or missed payments.

At Bionic, our team of experts will compare loans from a range of lenders to show you the real cost of your business loan so you can make an informed comparison.

What is the interest rate on a short term business loan?

The lending conditions of your loan will depend upon the amount you want to borrow and the amount of time you need to repay the debt, as well as the information held on your credit file and the current circumstances of your business. The type of loan and the lender you're borrowing from can also affect the interest rate.

As a general guide, you can expect average rates to be as follows:

  • Traditional bank loans – 2% to 13%
  • Loans and financing from online lenders – 7% to 100%
  • Invoice financing – 13% to 60%

Are you eligible for a short term business loan?

It's always worth working out whether you're eligible for any type of business finance before you apply. This is because a rejected application can lower your credit score. Multiple applications in any six month period can also have a negative impact, so you need to consider every application carefully.

Some lenders will offer a free eligibility check before you apply. Although this isn't a guarantee that they will lend to you, it will give you an indication of whether your application will be successful. This type of initial check is usually a 'soft search', which means it won't affect your credit score, so it's often worth taking up the offer.  

Lending criteria will differ from lender to lender and acceptance is usually based upon your credit history and current circumstances. For instance, some lenders will insist you've been trading for a certain amount of time and that you have a minimum annual turnover before they'll consider your application. That's why it's important to find the right type of loan and the right lender to meet your needs.  

Do you need a corporate bank account to apply for a short term loan for business?

Yes, you would usually need to have a business bank account to apply for any type of business financing, including a short term loan. However, some lenders may allow you to apply for a guaranteed business loan if you can offer assets - such as property or equipment - as collateral against the loan.

Are there any alternative short term financing options for business?

There are plenty of alternative short term financing options available to business owners if a short term loan from a bank or similar lender is not available to you.

Think about how much money you need to borrow when considering these options. If it is a small amount of cash that is only needed for a short period but you cannot get a business loan, then you could consider applying for a business credit card. These are great for overcoming difficult cash flow periods but can get expensive if you do not repay them quickly.

Other short term funding options include invoice financing - also known as factoring - which allows you to borrow money against the value of unpaid invoices from your customers, or working capital loans.

If short term loans seem expensive, as they often are, and you are confident that you can make repayments for a number of years into the future, then a longer-term loan may be more suitable. These could take longer to arrange with your bank but may prove to be less of a drain on your budget each month. There are many types of long or medium-term business loans available, and Bionic can help you find the one most suited to your needs.

How to find the right type of loan for your business

When you compare business loans with us, our tech-enabled team not only look at the different types of loan available but also compare lenders to make sure you get the finance that fits your exact needs.

We compare a range of business finance solutions, from unsecured business loans to commercial mortgages, as well as invoice finance, asset finance and a range of other solutions. To find out more, give us a call today on 0800 860 6833 or pop your postcode into the box on the right of the page and we'll give you a callback.