How to manage a short-term business loan

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Key takeaways

  • When you take out a short-term business loan, make sure to understand your loan terms, including interest rates and what happens if you fail to make payments

  • Stick to your repayment plan and avoid taking on other debts to help manage your loan effectively

  • Have a budget to help you manage your cash flow and cover all your business expenses

According to the 2024 Report on Employer Firms from the 2023 Small Business Credit Survey, 93 percent of businesses surveyed experienced a financial challenge in the previous 12 months. These financial challenges range from uneven cash flow to operating expenses and rising costs of goods and services, all common reasons to get a short-term business loan.

Since short-term loans have shorter repayment terms — often three to 18 months — managing them wisely is essential. Otherwise, you could end up defaulting on your loan or in a cycle of debt, creating more financial hardship.

5 tips for managing a short-term business loan

Regardless of the short-term business financing you choose, these five tips can help you manage your loan effectively, avoiding any financial issues in the future.

1. Know your loan terms

Loan terms determine everything from your monthly payment amount to maintenance fees and prepayment guidelines. They also outline the maturity date of your loan and what happens if you fail to pay on time.

Are you paying interest, or does your loan have a factor rate? Can you make additional principal payments? Choosing the right short-term-business loan for your organization can help you build your business credit score and grow your business, but failing to understand your loan terms could do the opposite.

2. Budget to ensure you can afford loan payments

It’s tempting to take out as much as a lender will give you, but the reality is that borrowing a smaller amount is often wiser. Especially when you consider all of the loan fees you’re responsible for. Similar to fast business loans, short-term loans are best for businesses that have immediate financial needs.

The average loan is subject to several fees, like application, origination, underwriting, late and administration fees. Use a business loan calculator to see your monthly payments to ensure you can afford your loan payments. Once you know what your loan payments will be, create a business budget to make sure you always have the funds to cover expenses.

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Bankrate insight

A business budget includes consistent costs, fluctuating expenses and occasional expenditures. Consistent costs remain the same regardless of income, while variable expenses fluctuate based on factors like sales activities. Occasional expenses are infrequent and non-recurring.

3. Stick to your repayment plan

On-time payments account for 35 percent of your personal FICO score and can affect your business credit score. As short-term loans have shorter repayment periods than other types of business loans, it’s easy to get into a cycle of debt if you are late or behind on payments. Additionally, failing to make payments could result in defaulting on your loan, impacting your business’s financial future.

Prioritizing on-time payments is the most important thing you can do to manage a short-term loan balance responsibly.

4. Avoid taking on other debts

Short-term loans can be an effective way to fund your business during seasonal slumps or in an emergency. But if you take on other debts, including additional small business loans, while repaying a short-term loan, it can become difficult to keep up with payments.

If your business needs additional funding during your repayment period, consider alternatives to short-term business loans or other types of financing before taking on new debt.

5. Stay in touch with your lender

Always reach out to your lender if you have questions or concerns regarding your loan. For example, contact them if you don’t understand an extra fee or can’t make a payment as your business is experiencing financial hardship.

The sooner you communicate your concerns, the more likely your lender will be willing to work with you to find a solution.

Types of short-term business loans

Typically, the best short-term business loans offer a quick turnaround to meet your business’s needs with repayment terms of 24 months or less. That said, exploring your options ensures you get the right short-term loan for your business. Here are some of the most popular types of short-term business loans.

Type of loan

Description

Term loan

  • A single lump sum of cash deposited in your account

  • Interest is paid on the full amount

Line of credit

  • A revolving line of credit

  • Only pay interest on the amount you use

Merchant cash advance

  • A loan based on credit card and debit sales

  • Loan is repaid based on future sales.

Invoice factoring

  • Businesses can sell their unpaid invoices to a factoring company

  • Can offer up to 90 percent of an unpaid invoice from an invoice factoring company

  • Once the invoice is paid, you get the remaining amount minus any fees

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Bankrate insight

A business credit card can help you cover short-term needs. It’s also a more cost-effective way to build business credit. You can use the card’s grace period to pay your balance off each month and avoid interest charges.

The bottom line

Short-term business loans are a good option for fast funding if you manage them correctly. By budgeting, understanding your loan’s terms, keeping an open line of communication with your lender and paying on time, you can manage your short-term loan successfully, making it a helpful tool for financing your business quickly.

Frequently asked questions about short-term business loans

  • Does a short-term business loan hurt your personal credit?Short-term business loans could hurt your personal credit if missed payments are reported to credit bureaus or you default on the loan. If you signed a personal guarantee, your personal assets could also be on the line.

  • What should I consider when choosing a short-term business loan?Before choosing a short-term business loan, consider the loan terms, fees, monthly payments, and repayment periods. Also, make sure the loan is suitable for your business’s needs.

  • What is the minimum credit score required for a short-term business loan?Credit score requirements vary depending on the lender, but it is possible to get a short-term business loan with a credit score of 500 from an alternative or online lender.

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