Short term business loans – what’s right for you

short term business loans

Short-term business loans have loan term periods of up to 24 months.

This should be long enough to help your business get through tough times or an expansion period.

 A short-term business loan is an excellent solution for your business needs and has helped many Aussie businesses through tough times like COVID-19 and recessions.

Following are a few short-term finance options that could be best for you.

Business overdraft

A business overdraft could be the perfect solution for short-term business loans if you need to access funds quickly.

 With a business overdraft, you must contact your bank and see if they will allow you to withdraw money from your regular transaction account. They might even have a pre-approved business overdraft facility if they know that you are a loyal customer with a solid trading record. After all, the banks are there to make money, and if you utilise their business overdraft, it’s an additional revenue stream for them. So it’s a win-win as you can access funds immediately. In addition, the advantage of this type of short term business loan is that you only pay interest on the money you use. 
Business overdrafts are either secured against an asset such as a property if you are a new business or unsecured if you can prove your trustworthiness. One thing to note about a business overdraft is that the bank has total control and can, if they like, withdraw this facility at any time, placing your business in a precarious position.

A business line of credit

 A business line of credit is like an overdraft; the only difference is that it’s not linked to your bank account. The advantage of a business line of credit is that you only pay interest on your funds. However, whereas a business overdraft is relatively simple, obtaining a line of credit makes you jump through a few more hurdles, such as your business’s trading period and its profitability. With the bank, you might also have to provide a level of security, such as an asset. In addition, obtaining a business line of credit through a bank can be a hassle with a mountain of paperwork, so a far better option is to use a private lender to manage this process for you.
Approval for a business line of credit is generally two days, and you can expect to have your funds within a couple of weeks.

Invoice finance to cover short-term business finance needs

In today’s COVID era, getting paid can be an issue for many businesses. The outstanding invoices are piling up, and waiting to get paid can drain your cash flow. Remember, you still have to pay wages, rent, tax, equipment hire, fleet expenses etc. Overdue invoices, however, can be used to your advantage where you use the invoice to borrow from a private lender. What happens is that a bank or lender will loan you the value of the outstanding invoice (up to 90%), and when you get paid, you pay back the loan. 

 Invoice financing is a great way to keep your business functioning while chasing up these debtors for payment. However, most lenders will only advance you the money if you can show that these debtors will pay and that you have a solid trading history with the customer.
Interest is only paid on the amount loaned, and because invoices are generally paid in less than 60 days, these interest payments are small. Therefore, this type of loan is an excellent alternative for many small businesses as it’s affordable as you only pay while the invoice is overdue. 
The only drawback with invoice financing is that the fees can be higher than other short-term funding. And, if debtors are super slow to pay with excuses as we can only pay you once we get paid, this adds pressure on you to collect as the interest bills mount up. Businesses that cannot apply for invoice financing do not issue many invoices, such as restaurants, cafes, fast-food & retail shops, or businesses paid upfront for their products or services.

Merchant cash advances

Because merchant cash advances generally have terms up to 12 months, they fall into the short-term business loans category. With merchant cash advances, the loan is secured against future credit card sales of the business or borrower. Once the funds are received, they are repaid when the business gets a merchant or EFTPOS payment. In other words, the lender will receive a percentage of revenue obtained from these merchants or EFTPOS receipts. Eventually, the loan is repaid this way through regular business trading.

 Secured short-term business loans

Secured short-term loans are a great way to obtain a loan for your business. The Sydney Morning Herald, in its article, claims major banks reject one in four small businesses for loans. They also say that: Challenger bank Judo has claimed that one out of every four requests by small to medium businesses for loans is rejected by the big banks, in what it described as a sign of “significant market failure”.

Judo’s 2019 SME Banking Insight Report found Australian SMEs are facing a funding gap of $91 billion, up from $83 billion last year.

The way around being refused by the banks for a loan is to offer an asset such as your home as security. Of course, they will have to see how your business is performing, but the chances of getting that extra cash with your asset as security. Banks are notoriously tight and can be very inflexible with their lending policies and can demand their loan back which is why secured business loans from other sources is a viable and preferred option for many companies looking to get access to funding fast. 
Learn more about secured short-term business loans from Sparrow

Choosing from the short-term business finance options available

When considering short-term business finance, it is good to explore all options on the table. Most prudent business owners will know what works best for them, but if you’re unsure, check everything; terms and conditions, exit fees, additional fees, and loan set up costs.

Why not chat with Ulrika, your loan specialist at Sparrow Loans if you are still unclear.

About the author

Ulrika Lobo

Ulrika Lobo is the lending specialist at Sparrow Loans and has over ten years of experience in the commercial business loan space. Ulrika co-founded Sparrow Loans to provide Australian SMEs with a faster and easier way to access finance. Ulrika is responsible for managing the lending process from underwriting to execution and settlement and post-settlement support.