5 Things to Consider Before Applying for a Short Term Business Loan

May 05, 2021

So, you're thinking of getting a short term business loan right? You're not alone. Truth is over 8 out of 10 businesses that close their doors, do so because of cash flow problems. So, we're glad you're making an effort to avoid that.

Many businesses routinely seek external funding in the form of loans to help move their processes along. So, it's not unusual to find that the loans are used to fund payroll, cash flow, and instant capital issues.

In fact, the average loan amount in 2018 issued by the Small Business Association (SBA) was $425,500. Most of which were used to solve business-related problems.

The good news is that more loan facilities are now available to the average small business owner than it was 10 years ago. With the SBA offering as high as a $5 million loan limit, small business owners should take advantage of this opportunity.

Whatever your reasons for taking a short term business loan, there are factors you must consider first. This way, you don't get blindsided by issues like payment penalties, interest rates and so much more.

Highlighting this is incredibly important because small business owners typically forget to read the fine print before agreeing to the terms. That said, let's jump right in.

Make Sure You're Qualified

It's one thing to want a loan, it's another to be qualified for it. Understanding the difference can be the difference between getting a loan fairly quickly or waiting for long, only to be denied the loan.

Most lenders are particular about who they lend to. They want to make sure that you're creditworthy. So, to qualify, pay attention to your credit history, maximum funding, business revenue, and loan duration.

Your credit score must meet the lender's minimum requirements. Otherwise, they'll most likely reject your small business short term loan application. They also favor people with a good credit history and a good credit score.

These business owners tend to attract higher credit limits and loans because the lenders consider them low-risk entities. Then, check out how much they're willing to lend you and the associated terms.

If you're looking to get an SBA loan, make sure you're eligible. If you're not, just don't bother as they take their eligibility criteria very seriously.

How Long it Takes to Get Approved

Business loan approval times vary, depending on the loan type, the amount required, financial institution and your creditworthiness. Most short term business loans can be disbursed fairly quickly if you meet their requirements.

Other loan types, however, can take a lot of time. For instance, SBA loans require a lot of paperwork, which can be time-consuming. If you're looking for something faster, you might want to talk to your local bank or seek alternative lenders.

The latter in particular, are great at speeding up the process and having your cash to you within the same business days to 5 days. This is probably why many small business owners are choosing this option, even if the interest rates can be somewhat high.

Do You Really Need the Loan?

One of the biggest mistakes you can make in business is taking a loan you don't need. Unfortunately, many people apply for a business loan only to use those funds for something else.

Avoid this completely. If you don't have a real need for the loan, just avoid it. And when you apply, make sure to be very forthcoming with your information.

Honesty is always the best policy. Your lenders are not interested in a hostile takeover. They want to make money by helping you with the cash infusion you need.

So, be completely honest, and forthcoming with whatever information they request.

You Might Need a Business Plan

You're probably thinking "why would I need a business plan?". Well, the reality is even if you've been in business for a while, lenders still need to see one. The smart play is preferably an updated one.

Traditional lenders like banks tend to request this before getting you the financing you need. They want to be sure that you have future financial projections, and are growing as you should. They also want to know if you'll be around for the foreseeable future -at least until you can pay off their loans.

Lenders want to know just one thing: can you pay back any loans they give you? That's their number 1 priority. Everything else is secondary. If you want to get that short term business loan, you better prepare this, particularly if you're going with traditional financial institutions.

This is why your business plans, which usually include projections, current revenue, and a few other important details, play a critical role in getting your loans approved or denied.

Keep in mind that Express Capital Funding does not require a business plan.

Be Prepared to Be Denied

Depending on the loans that you want, there's a 50/50 chance that you may or may not get it.

According to Biz2Credit, in 2016, institutional lenders approved almost 63 percent of loan applications, alternative lenders approved almost 61 percent of all applications and 42 percent for credit unions.

As you can see, not everyone who applied, got the short term business loans they wanted. So, even if you feel that you're qualified, you must make allowances for a denied loan application.

This way, if they fall through, you can seek out alternative sources instead of watching your business fold.

How Many Loans You Can Get

While most lenders have a lending limit, most don't give up to their loan limits. Those numbers are usually there as a benchmark of sorts, and only for the most qualified of all loan applicants.

So, what they give you will largely depend on their assessment of your risk profile. If you're a low-risk entity, they'll probably give you all the amount you asked for.

If you're considered a high-risk entity, you'll get less; how much less is completely discretionary. As stated earlier, their assessment process usually involves looking at parts of your business, inflow, outflow, credit history, and so much more.

Possibility of Needing a Collateral

Most people don't like hearing this, but that's just how it works. Lenders want to minimize their risk, and some often require collateral to make that happen.

Your collateral has to be equal to or even higher value than your loan amount. This way, if you fail to repay the loan, they can liquidate those assets and recover their funds.

The good news is since you're applying for a short term business loan, you can easily put up your business and its assets as collateral. There are lenders, such as Express Capital Funding that have other options without collateral, you might want to explore those first.

Many small businesses don't have problems with this though, because they know they'll definitely pay back the loan.

Choosing Your Loan Provider

Should you go with traditional or alternative lenders? That depends on what your needs are.

You have two options: traditional or institutional lenders and the newer alternative fintech-powered lenders. Fintech has transformed the lending subsector by introducing new, unconventional players.

In fact, fintech lending in the US has grown to corner 38 percent of the personal loans market. Worse, they snatched those markets from traditional lending institutions.

Unlike traditional lenders, these companies are giving out unsecured business loans without all the red tape. They're giving small business owners near-instant loans without tedious requirements like collaterals and so on.

Some of these providers offer lines of credit of up to $250k for small businesses. Even better, they often come to a decision within a day, which makes them ideal for every small business looking for an almost immediate cash infusion.

These companies are willing to take the risk that traditional lenders won't. And they're cashing in big as a result.

A third often less explored option is crowdfunding. Done correctly, this can be a really good source of short term business loans.

Short Term Business Loan Repayment Interest Rates

How much exactly are you paying back at the end of the day? What are their repayment terms? Are there penalties you should be aware of? When's your payment due? These are some of the things you need to figure out.

Institutional lenders and SBA loan repayment can attract interest rates exceeding 15 percent. Admittedly, these loans aren't usually for small amounts or to be repaid quickly. The loan can run for years.

In fact, higher loan amounts attract longer repayment periods and higher interest rates. The good news is fintech providers have favorable small business loan rates.

Just makes sure to read the fine print to make sure there are no hidden fees. Examples of hidden fees include processing fees, credit report fees, admin fees, underwriting fees, appraisal fees, and origination fees.

Is That Everything I Need to Know?

Pretty much, yes. It doesn't matter if you need the loan for equipment financing or payroll issues. Getting short term business loans can be quite the lifesaver in business. If you'd like more information on how you can secure the loan more easily, check out this resource on Express Capital Funding.


Additional resources on short term business loans for small businesses

hp_topic_ST_300x300 Before making a decision, find out all you need to know about short term loans. Learn the benefits, questions to ask your lender, and the greatest advantages of these small business loans. > Read more


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