What is a short-term business loan?
Short-term business loans are financing options designed to cover immediate capital needs for a short period, typically a few months to two years.
They can be a lifeline if your business is facing temporary cash flow gaps or sudden expenses. They allow you to cover operational costs, manage inventory, or invest in growth opportunities.
How do short-term business loans work?
Short-term business loans work by providing a lump sum upfront. Your business then repays this borrowing over a short period through fixed instalments.
These loans can offer access to funds relatively quickly compared to longer-term financing options. The application process is often streamlined, and approval turnaround times are typically shorter.
While short-term business loans offer flexibility and fast access, they can be more expensive than longer-term alternatives. This is because lenders recover their costs over a shorter repayment period, which can lead to higher interest rates.
What can you use a short-term business loan for?
Short-term business loans can be used for various purposes, helping you cover immediate costs or take advantage of growth opportunities. Some of the most common uses include:
- Managing cash flow gaps: Covering shortfalls when waiting for invoices to be paid or seasonal income fluctuations.
- Covering unexpected expenses: Dealing with urgent repairs, equipment replacement, or other unplanned costs.
- Funding stock or supplies: Purchasing inventory in bulk or preparing for a busy trading period.
- Seizing opportunities: Securing new contracts, investing in marketing campaigns, or launching new projects quickly.
This kind of funding can give your business the flexibility to handle challenges and move quickly when opportunities arise.
Types of short-term business loans
There are several types of short-term business lending that UK small businesses may consider:
- Unsecured business loans: These loans don’t require assets as security, making them quicker and easier to access. They typically run from 1 to 12 months, although you can borrow for up to 6 years. Because they carry more risk for the lender, interest rates can be higher.
- Merchant cash advances: Repayments are tied directly to card sales, with a percentage automatically deducted until the balance is cleared. These advances are typically repaid within 6 to 12 months, making them a short-term solution well-suited to businesses with steady card revenue.
- Working capital loans: These are a flexible finance option, designed to cover everyday operational costs. They are used for short-term cash flow gaps, managing seasonal demand, or paying day-to-day bills when income is delayed.
- Bridging loans: A fast, short-term solution designed to bridge the gap between when you need funds and when incoming cash arrives, such as awaiting the sale of a property. These loans are secured against an asset and typically come with terms of up to 24 months.
Each type of short-term business lending offers different benefits, and the right choice depends on your business’s financial situation, revenue model, and appetite for risk.
How much does a short-term business loan cost?
The cost of a short-term business loan depends on several factors, including the amount you borrow, the repayment term, and the loan type you choose.
The biggest cost associated with a short-term loan is the interest rate. Because these loans are repaid over a shorter period, interest rates are often higher than long-term financing.
Most short-term lenders charge a monthly interest rate, which typically ranges from 1.5 to 2.5%, depending on the lender and your credit history.
Some loans may also include arrangement fees or early repayment charges, though many providers allow you to settle the balance early without penalty.
Is your business eligible for a short-term loan?
Eligibility criteria for short-term business loans may vary among lenders, but typically include these main factors:
- Credit score: Most lenders consider a business’s credit score as an indicator of its financial health. While each lender has its minimum requirement, a higher credit score generally improves your chances.
- Business cash flow: Lenders assess your business’s ability to generate revenue and meet financial obligations. A steady cash flow demonstrates stability and repayment capacity.
- Trading history: Established businesses with a track record of operations may find it easier to secure short-term loans than new companies or startups.
- Personal guarantee: Some lenders may request a personal guarantee to secure the loan, mitigating their risk. This means you will be personally responsible for the loan if your business fails to make the repayments.
- Loan purpose: A clearly defined loan purpose, backed by a clear plan outlining how the funds will be used, can strengthen the loan application.
Pros and cons of short-term business loans
Like any form of borrowing, short-term business loans have advantages and disadvantages. Understanding these can help you decide if they are the right option for you.
Pros of short-term business loans
- Fast access to funding: Many lenders can release funds within 48 hours, making them ideal for urgent needs.
- Flexible use: Short-term loans can be used for cash flow, unexpected expenses, or growth opportunities.
- No long-term commitment: Repayment periods are short, so your business won’t be tied to long-term debt.
- Easier approval: Lenders can be less stringent with eligibility criteria for short-term loans.
Cons of short-term business loans
- Costs can be higher: Interest rates and fees are typically higher than long-term borrowing.
- Higher monthly repayments: Borrowing over a shorter period means the repayment instalments can be higher.
- Smaller loan amounts available: Short-term loans often provide smaller sums than long-term loans.
- Risk of over-reliance: Frequently using short-term loans can become expensive and mask underlying financial problems.
How to get a short-term business loan
When looking for a short-term business loan, you may need to prepare and present various documents to support your application. These documents often include:
- Financial statements: Current balance sheets, income statements, and cash flow statements are crucial in providing a snapshot of your business’s financial health.
- Bank statements: Recent bank statements that highlight cash reserves and transaction histories.
- Collateral documentation: If the loan is secured with a business asset, proof of ownership or valuation documents may be necessary.
You should confirm the specific documentation required by the lender before you start the application process. We can help you do this during your application through our platform.
Apply for a short-term loan with Aurora Capital
Applying for a business loan through Aurora is quick and easy. Here are the steps to follow:
- Complete the online application: You’ll just need to provide your business details, turnover, and how much you want to borrow
- Submit paperwork: Provide the documentation outlined above to support your application.
- Get a decision: Applications can be processed within 24 hours, with funds often available within 48 hours.
- Receive the funds: Once the loan is approved and the agreement is signed, it can be transferred to your business bank account.
You can apply for a working capital business loan with Aurora Capital in minutes. You can receive a free, no-obligation quote, and applying won’t affect your credit score.
Short-term business loan FAQs
How long does it take to get a short-term business loan?
How long it takes to get your loan depends on things like how much you want to borrow, the type of loan you choose, and your business’s finances.
When you apply with Aurora Capital, the application only takes a few minutes. We’ll then match you with the best finance option for your business, and you can get a decision within 24 hours.
If accepted, you could receive the funds in a matter of days or even hours. However, it may take longer if your application is more complicated.
Can my business get a short-term loan with bad credit?
Yes, some lenders offer short-term loans to businesses with poor credit, but your options may be more limited.
You might have to pay a higher interest rate or need to provide a personal guarantee, which means you’ll be personally responsible for the loan if your business can make the repayments.
Improving your business’s cash flow and demonstrating strong trading performance can help increase your chances of approval.
Can sole traders apply for short-term business finance?
Yes, sole traders can apply for short-term business loans in the UK. Some lenders offer products specifically designed for small businesses and self-employed individuals.
As with limited companies, lenders will look at your credit history, trading records, and cash flow to decide whether to approve your application.
Will I need a personal guarantee to get a short-term loan?
Some lenders will ask for a personal guarantee when offering a short-term business loan, especially for smaller companies or if your business has a low credit score.
This gives the lender security that the loan will be repaid. However, requirements vary, and some lenders may not ask for a personal guarantee depending on your financial profile.
