Let’s take a closer look at short-term business loan interest rates and how they cause headaches for the unprepared.
Taking out a short-term business loan can be a quick solution to minor finance problems, but you should know the details of this type of loan and what you’ll need to make your application a success.
What is a short-term business loan?
A short-term business loan is a (relatively) small loan you can take out for your business to give you a quick injection of cash.
It is best for holding on through testing financial periods that you foresee as being resolved in the near future, but can also be taken out when the business is generally healthy and needs a cash injection to invest.
The ‘short-term’ of the loan refers to the repayment terms, which will typically extend up to a maximum of one year.
The main strength of a short-term business loan is that it provides fast cash that the business can invest and spend however it wants, minimising the disruption to normal business operations and allowing it to be more fluid and responsive to changing markets and fluctuating finances.
Otherwise, short-term business loans work pretty much the same as any other loan a business might take on. Your interest rate, however, may be higher than a long-term loan due to the simpler way in which interest is calculated.
What is the interest rate on a short-term business loan?
The interest rate on your short-term loan will vary depending on the lender you use, the personal credit of the director, and whether it’s variable or fixed.
Monthly interest rates from a lender can be as low as around two or three per cent, or could be much higher depending on your circumstances or those of your business. Short-term loans tend to use simple interest, unlike long-term loans which lean more towards compound interest and advertise with annual percentage rates (APR).
This means that short-term business loan interest rates are calculated simply off the amount borrowed and how much must be paid back according to the interest percentage, whereas loans using compound interest will accrue extra interest as time goes on until they’re paid off.
Of course, the interest rate is only part of the story, and isn’t the only thing that should be drawing your attention.
You should also make note of your repayment term, i.e. the length of time you’re borrowing the money for. Ideally, you want to keep this as short as you can manage, particularly if you’re looking at higher interest rates.
Additionally, there may be hidden charges to bear in mind, such as:
- Early repayment fees: if you want to pay off the loan earlier than the time frame laid out in your terms, there may be an extra fee to pay on top
- Late payments: as is to be expected, failing to pay instalments on time could end up costing extra. Given the already-higher interest rates on a short-term loan, you don’t want to be adding onto them and make your lender unhappy!
Why would a business need short-term finance?
Not all businesses that turn to short-term loans are struggling. Indeed, many in dire straits with their finances will likely need a long-term solution and would be looking at that type of solution.
Short-term business loans are simple cash injections with simple repayment terms, so they’re best for businesses that simply need a little boost and have a healthy enough outlook that they can return the money with little issue.
There are many reasons why this could be. It may be that some businesses experience dramatic seasonality, like heavy sales over the Christmas period followed by a lull in business, or a similar boost in the summer months that dies off over winter.
If an unexpected cost or investment opportunity were to occur during these slower periods, there might not be the available capital to address them as you’d like. But with a short-term loan that you know you can repay when business picks up again, these scenarios can be smoothed out easily and with little risk.
Where can I ask about short-term business loans?
If you need an expert guide in the world of short-term business loans, then reach out to our team at Business Finance House.
We can talk you through how to get a short term business loan, short-term business loan interest rates, help you understand terms, and generally give you all the essential information when it comes to short-term borrowing. What’s more, we can then arrange your borrowing and help you unlock quick, efficient funding.
We operate nationally but our business loans in Liverpool and Cheshire allow us to take advantage of local knowledge hopefully giving us a competitive edge. To find out more about our services and how we can help you, whether you’re running an SME or you’re a sole trader, contact us now.
