A short-term business loan is a loan your business repays over a short period, anywhere from a few months to around two years. It’s designed to cover temporary needs, such as a tax bill, a gap in cashflow or a one-off opportunity, rather than long-term investments like buying premises.
Because you repay the loan quickly, short-term business loans usually come with higher monthly repayments than longer loans, but you may pay less interest overall. This guide explains how they work, when they make sense and what to consider before you apply.
Key Points
- A short-term business loan is repaid over a few months to around two years and is often unsecured.
- It works best for temporary needs, such as tax bills, cashflow gaps, seasonal stock or a time-limited opportunity.
- Monthly repayments are higher than on longer loans, but you may pay less interest overall, especially if you repay early.
How Does a Short-Term Business Loan Work?
With a short-term business loan, you borrow a fixed amount, then repay it, plus interest, in regular instalments over an agreed term. The main difference is the length of that term.
Most short-term business loans are unsecured, which means you don’t have to put up property or other assets as security. However, lenders may ask for a personal guarantee from the company’s directors, particularly for smaller or younger businesses.
Because the lender is getting its money back over a shorter period, the application process is often quicker too. Many lenders can make a decision within a day or two once they have your bank statements and basic business details.
When Should I Use a Short-Term Business Loan?
You should use a short-term loan when you have a specific, temporary need and a clear way to repay the money. Common uses include:
- Paying a tax bill on time. VAT, PAYE and Corporation Tax bills can arrive at awkward moments. Many businesses use VAT loans and other tax funding to pay HMRC by the deadline and avoid penalties and interest.
- Covering a gap in cashflow. If customers are slow to pay, a short-term loan can keep your business running while you wait for invoices to be settled.
- Buying stock for a busy season. Retailers and wholesalers often need to buy stock before peak periods, such as Christmas, then repay the loan once sales come in.
- Taking advantage of an opportunity. A supplier discount for bulk orders or a new contract that needs upfront investment may only be available for a short time.
- Dealing with an unexpected cost. Emergency repairs or replacing broken equipment can’t always wait.
In each case, the money you borrow should help generate the income you need to repay it, or bridge a gap until money you’re already owed comes in.
What If My Customers Pay Late?
If a customer pays you late, the law may allow you to charge statutory interest and a fixed sum to cover the cost of recovering the debt. You can read more about your rights on late commercial payments on gov.uk.
Charging interest won’t get the money into your account any faster, though. A short-term loan can keep your business moving while you chase the payment, and you can then use the money once it arrives to repay the loan.
How Much Does a Short-Term Business Loan Cost?
The cost of your short-term business loan depends on how much you borrow, how long you borrow for and the lender’s assessment of your business. Lenders will look at your turnover, how long you’ve been trading, your credit history and your existing borrowing.
Interest rates on short-term loans can be higher than on longer loans, because you’re borrowing for less time and the loan is often unsecured. However, as you’re paying interest for fewer months, the total amount of interest you pay may be lower overall.
Always look at the total amount repayable, not just the interest rate or monthly repayment. Check whether there are any arrangement fees, and whether you can clear the loan early without a penalty. Many short-term business loans can be repaid early, which can reduce your total cost if cash comes in sooner than expected.
What are the Advantages of a Short-Term Business Loan?
The advantages of a short-term business loan include:
- Speed. Applications are usually simpler, and funds can often be released within days.
- Less long-term debt. You’re not committed to repayments for years, which leaves room to borrow for other things in future.
- Lower total interest. Even with higher rates, a shorter term can mean you pay less interest overall.
- No security needed in many cases. Your property and assets aren’t usually at risk.
- Predictable repayments. Fixed monthly instalments make it easier to plan your budget.
What are the Disadvantages of a Short-Term Business Loan?
Some of the disadvantages of a short-term business loan can include:
- Higher monthly repayments. Repaying over a short period means each instalment is larger, which can put pressure on your cashflow.
- Higher interest rates. You may pay a higher rate than you would on a longer, secured loan.
- Not suited to long-term needs. Using a short-term loan for a long-term project can leave you struggling to repay before the project starts making money.
Before you borrow, work out whether your business can comfortably afford the monthly repayments alongside your other costs.
What Are the Alternatives to a Short-Term Business Loan?
Depending on what you need the money for, some of the alternatives to short-term business loans may be a better fit. These can include:
- Working capital loans. If your cash gaps are regular rather than one-off, working capital loans are designed to support day-to-day running costs.
- A business credit line. This lets you draw funds when you need them and only pay interest on what you use, which suits businesses with frequent but unpredictable cash needs.
- Asset finance. If you’re buying equipment or vehicles, spreading the cost through asset finance is often cheaper, because the asset secures the borrowing.
- A payment plan with HMRC. If the problem is a tax bill and you cannot pay your tax bill on time, HMRC may agree to let you pay in instalments, although interest still applies.
How Do I Apply for a Short-Term Business Loan?
To apply for a short-term business loan, most lenders will ask for recent business bank statements, details of your turnover and trading history, and identification for the directors or owners. Having these ready before you apply speeds things up.
At Acceptance, we ask for 3 to 6 months of bank statements, at least 12 months of trading and a turnover of at least £50,000 in the last year. Checking your eligibility won’t affect your credit score, and we can match you with lenders whose criteria suit your business.