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What is a short-term business loan?
A short-term business loan is a type of secured or unsecured business finance with a term of between one month and three years. They are usually used by businesses to cover sudden expenses or to capitalise on a limited-time growth opportunity. They are also popular with seasonal businesses in Australia.
A short-term business loan provides access to funds from a lender for any genuine commercial purpose. Lenders will assess the revenue of a business to determine whether it can comfortably repay the loan amount. The business will agree to repay the loan amount plus interest over an agreed term.
What can you get?
- Loans from $5,000 up to $2 million
- Terms between 1 month and 3 years
- Secured and unsecured options
- Available from banks, credit unions and specialist online lenders
- Fastest approval from specialist online lenders
- Finance for a wide range of business purposes
- Generally higher interest rates and fees than long-term finance
How short-term business loans work
Short-term business loans are used in Australia by businesses that require fast access to finance and can demonstrate an ability to comfortably repay the loan amount over a short period of time.
There are two types of short-term business loans
Secured short-term business loans
A secured short-term business loan uses an asset (also known as ‘collateral’), such as residential property, as a guarantee on the loan.Secured finance usually means you get a lower interest rate and can borrow a higher amount. However, the application process may take longer.
Unsecured short-term business loans
An unsecured short-term business loan does not require any security. With unsecured business finance it's usually possible to get the loan approved faster, but higher interest rates and fees may apply. It may be difficult for newly-established businesses to be approved for unsecured short-term finance.
Reasons to use a short-term business loan
Whether secured or unsecured, short-term finance is generally used to cover immediate operating costs. Invoice finance is another potential source of short-term finance for business with outstanding invoices.
For ongoing access to working capital, a business line of credit or business overdraft are popular options.
For longer-term investment, like purchasing equipment and asset finance, a chattel mortgage – will generally be more suitable.
Short-term business loan example
Capitalising on a limited-time opportunity
To better understand how short-term finance can support a small business, let's look at the example of a retail business looking for a loan amount of $50,000.
Is short-term finance better than long-term finance?
Short term business loan
Term: 1 month - 3 years
Rates: Usually higher and often represented as a factor rate, particularly if the loan term is less than 12 months.
Fees: Up-front (often a percentage of the loan amount)
Loan purposes: Unexpected one-off costs, cash flow during quiet operating periods, buying extra stock, one-off growth opportunities, paying a tax bill
Long term business loan
Term: 3 - 5 years
Rates: Usually lower than short-term loans but costs add up significantly over time. Particularly if there are recurring costs.
Fees: Up-front and ongoing fees, fees for early repayment.
Loan purposes: Purchasing assets, vehicles and machinery, acquiring another business.
How to qualify for a short-term business loan
Qualifying for a short-term business loan can be relatively simple. If your business bank statements illustrate an ability to comfortably repay your desired loan amount within the agreed loan term, you will qualify for approval, assuming you meet the basic eligibility requirements:
- Have been trading for at least 6-12 months;
- Have an ABN and are registered for GST (including sole traders and self-employed individuals)
- Have a clean credit history (you can check your credit score for free before you apply)
How to apply for a short-term business loan
There are two main types of applications, which will depend on the amount you wish to borrow. Either way lenders will assess an application based on the monthly revenue of the business, its intended use for the loan, how the loan will benefit future business revenue, and more.
Borrowing less than $100,000
For smaller loans, the approval process will be fairly simple and you may even be approved on the same day. You can generally apply online with a number of different specialist business loan lenders, including those who provide short-term business loans designed specifically for SMEs.
You'll need to provide: -Proof of identity -An ABN and GST registration -Business bank account statements -Trust Deed if the business is held in a trust -Australian Taxation Office (ATO) Portal access.
Borrowing more than $100,000
For larger amounts, your lender will require all the documentation provided if borrowing less than $100,000 plus additional information to assess your application. You'll typically need to speak directly with a broker or lender, as opposed to being able to apply completely online.
You'll need to provide: -Financial records (provided by your accountant) -Profit and loss statements -Balance Sheet
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Reasons short-term business loan applications are declined
The number one reason short-term business loan applications are declined is because your business financials do not illustrate an ability to service the loan amount.
You can strengthen your application by providing a lender with a business plan — a detailed plan showing how you plan to use the funds and meet your repayments.
Other common issues with applications include:
1
A bad credit rating
In other words, the business owner or director has a bad credit score.
2
Limited customer base
Your revenue is too dependent on a small number of customers.
3
Poor projected growth
The outlook for your market sector is poor and your business may struggle to meet the loan repayments.
4
A new business
Your business hasn’t been operating for long enough and a lender cannot accurately assess your revenue.
