As a small business owner, there will most likely be times when business finances could use a little push or an opportunity may arise to expand the business. Many small business owners may have never considered the option of applying for an online business loan. Maybe because they are unaware of the ease of the application process or the doors that can open for the business when an influx of cash comes through. 

A business can use the funds for a variety of things such as purchasing stock, hiring employees, covering short-term cash flow fluctuations, purchasing equipment, or leasing a larger office space. Having access to an extra loaned amount can give a business opportunities for change and growth. 

What are short term business loans?

A short-term business loan is a lump sum of cash lent to a business by a lender with set repayment periods that accrue interest. The repayment time frames on a short term loan are usually 3 - 18 months however they can extend to 3 years. Some common types of short term business loans include bank overdrafts, small business loans, or a line of credit. The type of loan you choose can be secured or unsecured.

The main difference between secured and unsecured short term loans is that, when choosing to secure your loan, you will need to use an asset as collateral. 

A secured loan is a loan that has an asset to guarantee that the loan will be repaid. And in the case you can’t repay the loan, the lender can seize your asset as payment. When you have a secured business loan, a lender could ask for your loan to be wagered against property, vehicles, warehouses, offices, or even a piece of machinery. The lender has the right to sell any of the collateral used to guarantee the loan if you default on your repayments. This can be very risky for a business that uses the equipment, warehouse, or property to run its business operations. 

This is why unsecured loans can be very popular for small business owners if they are approved. Unsecured loans tend to be the most common loan type small business owners choose. This is so they don’t run the risk of losing the collateral in case they default on the loan. 

What to avoid when looking for short term business loans

Receiving a lump sum of cash has great benefits but does not come without some potential risks. Risks can involve borrowing too much, not using the loan properly, the way the loan is structured, hidden fees, a bad credit score, and choosing the wrong lender. Here are some potential risks to look out for when applying for short term business loans.

1. Misuse: not using the funds for what the loan was originally intended for is a common mistake that can be made by business owners. For example, a business owner establishes a line of credit as a contingency fund and then decides to go and spend the credit on an unnecessary new car.
2. Financial concerns: borrowing money to expand the business is always a great option, however it is crucial to evaluate if the business can comfortably make the set repayments once the loan has been approved. For instance, it may be better in the short term to continue to operate the business within its current capacity, if financial commitments such as rent, utilities, and wages are already tight. Once cash flow increases more and the opportunity to expand arises, a loan could be helpful to maximise the benefits. 

• High and hidden fee risks: it is recommended to research loan offering by different lenders including their interest rate and other charges before applying for a loan. In some cases, a business may take on a short term loan from a lender and be stuck with an agreed-upon interest rate that is far higher than its competitors sticking the borrower with potentially thousands of dollars in excessive interest fees. Also, a borrower should make sure to familiarise themselves with the lender's terms and conditions. There may be unnecessary account keeping fees or early exiting fees to name a few. 

• Bad credit score: while repaying credit is one way to improve your credit score, habitual borrowing can pull your business into a never-ending cycle of paying off debt and interest. It’s not recommended to take out a loan just because you can always make sure the money serves a purpose to expand the business. Keep in mind that failing on any regular repayments will negatively impact your credit rating. 

• Wrong lender: when researching short term business loans, not all lenders will have a loan product that will best suit you and your business. It is advised to have a good look into 3-5 lenders before settling on one. Look at their online reviews and enquire about any hidden fees. You can also get a good understanding of their customer service process if you encounter any issues down the line. 

Benefits of short term business loans

Fast easy application process. A short term loan from an online lender is an easy and quick way to apply for a loan. Their application processes tend to be automated and most have a handy online calculator available where you can work out your loan repayments ahead of time. 

Same day funding. Many lenders have now structured their loans to meet the needs of modern-day business owners and have the process in place to turn cash around quickly and provide the borrower with the funds within 24 hours and more often than not, on the same business day.  

How to apply for a short term business loan?

When applying for a short term business loan, there are some simple yet effective steps that you can take to increase the chances of success:

• Know where the money is going. Being able to show this to the lender will help them make their decision whether or not they feel comfortable that you can repay the debt.
• Business plan. Put together a clear business plan with foreseeable growth in cash flow included.
• Documentation. Have a current ABN number, proof of identification, financial statements including net income and expenses all ready to show the lender.

Choose a lender. Determine a lender with a loan product that is right for you.