Short-Term Business Loan


Article published by
Darin Hindmarsh
Accessing short-term business loans can mark the distinction between progress and stagnation for small and medium-sized enterprises (SMEs). In Australia, SMEs account for an impressive 99.8% of all enterprises, constituting over 66% of the private sector workforce. Federal and state policy measures are designed to bolster the provision of short-term business loans, aiming to bolster SME growth.
Why are short-term business loans crucial for SMEs? Launching a new business venture often means an entrepreneur is more limited finance-wise. Usually, he or she may tap into personal savings or contributions from friends and family. However, once eligibility for financing is established, opting for a short-term business loan can significantly enhance working capital and establish the legitimacy of your business.
Whether your company requires an infusion of essential funds to fuel daily operations, secure equipment financing, manage loan repayments, or address various financial needs, a short-term business loan emerges as an accessible and pragmatic solution.
What is a short-term business loan?
A short-term business loan can be secured or unsecured financing offered to businesses to cover sudden expenses or fund growth opportunities. Expenses could be additional inventory, marketing costs, etc. Short-term business loans are beneficial for SMEs that can maximise seasonal events.
Short-term business loans can finance any genuine commercial purpose, regardless of which industry you belong to. This is precisely why it’s a convenient solution for your business. Whereas most business loans, e.g., equipment finance, can only be used to purchase machinery or office equipment, a short-term business loan allows you to use the funds depending on where you need to inject that capital.
They can be secured or unsecured and usually have a term of one month and three years. Lenders assess the business’ credit and revenue records when determining the ability to repay the loan applied for. The principal will come with interest over an agreed-upon term.
Types of short-term financing
Working Capital Loans – Banks and private lenders offer loan agreements after considering the business’ working capital cycle, records, overall value, etc. Once the loan is approved, the client can repay in small installments or opt for full payment at the end of the tenure.
Trade Credit – This financing option involves seeking credit from suppliers. The supplier typically extends terms. An example is 2/10, net 30 – where you get a 2% discount if you pay in 10 days, and the balance should be paid within 30 days. This applies well to financing inventory.
Line of Credit – This is a convenient financing feature extended for businesses to access cash when needed and is preferred by those who want continuing credit access instead of a loan amount to be received once. Your company should have an excellent credit record to get approved for an unsecured business line of credit.
One off trade debtor invoice facilities – This allows for a single qualifying invoice to be paid-sometimes 80% of the value. Is done at a higher rate and fees, but very useful for some businesses to maintain cash flows.
How much can I borrow?
SMEs can choose to borrow from $5,000 up to $250,000. The lender may allow up to $10,000,000 for businesses with higher serviceability. Remember, though, that the amount you can loan depends on how the lender looks at the size, longevity, collateral (for secured loans), and revenue of your business. If you opt for a secured small business loan, your asset security may need to be higher in value than the loan amount you are borrowing.
Who can apply for a short-term business loan?
Lenders will have varying requirements, but here are the general factors to meet when applying for short-term business financing:
- Be an Australian resident
- Own a registered company through an ABN or ACN. The company must be at least six months in operation
- Present financial documentation demonstrating how the loan will be repaid reliably. Include bank statements, cash flow statements, debt records, etc.
- Present assets as security
What features make short-term business loans attractive?
- Short loan terms – Small business loans have immediate terms that start from 3 months to 3 years.
- Flexible amounts – Whether you need a smaller fund or a larger amount, you can borrow a minimum of $5,000 up to millions of dollars to finance your business operations or expansion.
- Loan security option – Small business loans can either be secured or non-secured. You can choose to put an asset forward as security to add a safety net in case of inability to make repayments. Collateral is varied, as it includes high-value assets like boats, jewelry, art, and real estate.
- Fast turnover – Upon approval you can already receive funds within 24 hours.
- Early repayments – Lenders usually allow early repayments without additional fees.
- Interest-free periods – Some small business loans offer pre-paid interest periods (e.g., six months).
How to compare short-term business loans?
Our loan professionals can help business owners navigate their options by examining these key considerations:
Your eligibility. Your business may need to have been in operations for a minimum period, usually 6 months to 2 years. The longer and more established your business, the lower your risk seems than new startups. You’d also turn over information about business revenue and financial records, along with any existing debts.
Interest rates, fees, and comparison rates. While comparing interest rates is a vital step in assessing loan competitiveness, don’t overlook the significance of fees and the comparison rate. The comparison rate combines both the interest rate and applicable fees, providing a comprehensive view of the loan’s true cost.
Loan term. Your loan term determines the duration within which you’ll repay the loan. This timeframe directly influences your monthly repayments, as opting for a shorter term often leads to higher monthly payments, whereas longer terms may result in increased overall interest and fees. Using our business loan calculator helps gauge repayment estimates for varying loan terms.
Minimum and maximum amount. Lenders establish minimum and maximum lending amounts. Prior to committing, verify that the loan amount you require falls within the lender’s offering range.
Loan features. Distinct business needs warrant specific loan features. Confirm whether the loans you’re considering offer desired features, such as provisions for early repayments, penalty-free early exits, or redraw facilities.
Turnaround time. Time sensitivity may dictate your decision-making, especially if you have a seasonal venture that needs immediate capital. Knowing the lender’s approval process and fund transfer duration ensures that the lender you choose can accommodate your timeline.
Credit and legal implications. Be mindful of deciding whether to go for secured or unsecured loans. Your other assets will serve as security in secured loans, so be prepared for repossession in case of inability to pay off the loan. And in unsecured loan agreements, the lender can initiate legal action if you don’t make repayments. This could negatively impact your credit score.
Short-term business loan needs here
As you compare short-term business loans, a comprehensive assessment ensures you’re factoring in each loan’s full scope of costs, benefits, and capabilities.
Choosing the wrong type of short-term business financing may put you in a hole that’s too costly for your company. You must calculate the cost of the loan, any ongoing fees, and interest rates to see if the business can manage the loan repayment comfortably.
If you are unsure, our financial brokers are here to study current small business loan products and help you decide the most suitable one for your needs. Our network of trusted lenders all over Australia has got your SMEs covered. Book your appointment here to get started.