Most small-to-medium enterprises (SMEs) reach a point when they need a quick cash injection but don’t want to be stuck paying interest and fees in the long term.
A short-term business loan can provide the money to smooth out temporary shortfalls in your working capital, cover unexpected expenses or fund a growth opportunity.
Key points about short-term business loans
- Short-term business loans come in two categories — term loan or line of credit
- Interest rates for short-term loans are typically fixed, ranging from 10-25% p.a.
- Terms on a short-term business loan can range from 3 months to 5 years (for a line of credit)
- Short-term finance is commonly used to cover working capital needs or finance time-sensitive opportunities
Top 5 short-term loans for businesses
1. Unsecured business loan
An unsecured business loan is the most common type of finance for small businesses as there’s no risk to physical assets. You don’t need to provide collateral like property or other assets as security for the loan. Instead, the lender will look at your business credit profile (creditworthiness, plus revenue).
Because there's no collateral to reclaim in the event of default, there's more risk to the lender, which will be reflected in your interest rate. Loan terms on unsecured finance are usually shorter — this allows businesses to cover temporary cashflow fluctuations without being tied to a lengthy finance contract. According to Lend proprietary data, the median loan amount requested for an unsecured business loan is $134,000. An unsecured business loan is a good option for short-term financing without requiring collateral.
Pro tip: Missed payments will incur fees and be recorded on your credit file, so ensuring you meet your repayment obligations is important. Some lenders may ask that you provide a personal guarantee for your short-term business loan, which would make you or the guarantor liable for the debt.
2. Business credit cards
Business credit cards provide a revolving line of credit with tangible benefits like interest-free periods (up to 55 days), rewards points on eligible purchases and insurance. You can use a credit card for all business expenses, including essential purchases (e.g. office supplies), travel or miscellaneous expenses, vendor payments, emergency costs, etc.
Although, there are transaction limits and business credit cards have higher interest rates compared to traditional small business loans. Business credit cards are easily accessible through bank and non-bank lenders. A credit card offers flexible short-term financing with added perks and interest-free periods.
Pro tip: If you don’t clear your credit card balance before the end of your interest-free period or billing cycle, you’ll pay interest on the remaining balance from the date you made the purchases (i.e. no interest-free days). Credit card interest rates are among the highest lending rates, so avoid getting stuck with a large credit card balance. As well as interest, many credit card facilities have annual administration fees. Low-cost cards with no facility fees may have longer interest-free periods and lower interest rates but tend not to offer rewards.
3. Business overdraft
A business overdraft is another revolving line of credit allowing you to draw funds when your business transaction account is negative. The interest is charged daily on the amount overdrawn until it's fully repaid. You pay zero interest if you don't use the overdraft facility. There's usually an annual fee to keep the business overdraft available 24/7.
Overdrafts are an ideal fallback for your working capital so that you can cover regular bills (e.g. utilities, tax instalments, insurance payments) as they fall due, even if your income is inconsistent. According to Lend proprietary data, the median amount requested for a business overdraft is $50,000.
Pro tip: Interest rates on a business overdraft are much higher than a traditional loan, so you should only use it to cover seasonal cashflow shortfalls, not as a long-term finance solution or for capital expenditure.
4. Line of credit
A business line of credit works similarly to an overdraft or credit card. It's a revolving line of credit to draw funds from as you need up to a predetermined limit. Usually, you’ll pay a facility fee and then interest on the daily balance.
The difference is that a line of credit isn’t attached to your business trading account. It can be secured by property or liquid assets such as stock or accounts receivables. The lender will provide a line of credit up to a percentage of the value of those assets (sometimes up to 80%). The median amount requested for a business line of credit is $40,000, according to Lend proprietary data.
Pro tip: Lines of credit are generally more expensive than a business loan but more flexible in their terms. You can use a line of credit for any genuine business expense, although access to working capital and expansions are the most common purposes.
5. Invoice finance
If you offer credit terms to your customers, invoice finance (or invoice factoring) can boost your cashflow without going into debt. It’s a cash advance or line of credit secured against your outstanding invoices. It involves selling your accounts receivable to a factoring company (or factor), which advances you up to 80% of their value and takes responsibility for collecting your clients' payment(s). Once your customers pay their invoices, the factor deducts a percentage fee (3-5%) and then pays you the remainder. According to Lend proprietary data, the top industries that use invoice factoring include construction and trades, professional services and retail. This option accelerates cashflow in the short term without taking on debt.
The two main types of invoice factoring are recourse and non-recourse:
Recourse factoring: The debt risk remains with you. If a customer doesn’t pay their invoice, you must buy back the outstanding receivables and chase up the debt(s) yourself.
Non-recourse: The factor takes on the debt risk. It assumes all responsibility for collection and the liabilities if your customers don't pay their invoices. You'll receive no additional payment, while the factor takes the loss. For this reason, they charge you a higher fee and may impose stricter criteria for your invoices and customers.
Pro tip: Invoice factoring is not confidential by default, which means your customers could be notified their invoices have been sold to a third-party company for collection. Make sure to use a reputable factoring company experienced in client relationships, or this could impact how your customers interact with your business (if at all) in the future.
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What you need to know about short-term loans for business
Not suitable for capital expenditure. Be aware that short-term business loans should not be used to purchase major assets like vehicles, machinery or equipment you’ll need to pay off over a long period.
Short-term business loans have a set duration. There’s no guarantee of getting a short-term business loan renewed at the end of the initial term.
Interest rates on short-term loans are typically fixed. Your rate will usually remain the same for the loan's entire term, or may be fixed for a period of time (e.g. business line of credit or overdraft).
Short-term business loans are more expensive. Short-term loans come with higher interest rates compared to standard business loans. Additional fees also apply, so it's important to calculate your business loan's cost before entering into any formal agreement. Learn how to apply for a short-term business loan.
Bank vs non-bank lender: Which is best for a short-term business loan?
Non-bank lenders offer benefits that can be particularly useful to small businesses. Firstly, they often have a quicker approval process and offer more flexible terms. This allows enterprises to cover cashflow fluctuations or access immediate funding without getting stuck paying interest in the long term.
Secondly, non-bank lenders tend to be more risk-tolerant than traditional lenders. They may be willing to offer finance to businesses that wouldn't otherwise qualify for a traditional business loan. This is usually because of an insufficient trading history, lack of collateral, bad credit, or the industry in which they operate.
Finally, non-bank lenders can offer competitive interest rates as they have lower overheads and more streamlined processes. They use technology to analyse your business profile, credit report and business bank transaction data in just minutes!
Compare short-term business loans
|Loan type||Description||Amount||INTEREST RATE RANGE||term|
|Unsecured business loan||Term loan is repaid in regular payments over an agreed period||$5K - $500K||15-20% p.a.||3-12 months|
|Business credit card||Flexible source of cashflow with interest-free periods, rewards, etc ||$10K - $500K||15-25% p.a.||Ongoing credit facility with interest-free period (0-55 days)|
|Business overdraft||Access funds when your business account is below zero and only pay interest on the overdrawn amount ||$5K - $1M||10-15% p.a.||3-30 months|
|Business line of credit||Access extra funds when you need and only pay interest on what you borrow||$5K - $1M||10-15% p.a.||3 months - 5 years|
|Invoice finance||Get some of the value of your unpaid invoices upfront||Any amount||3-5% of the invoice value||30-90 days|
FAQs about short-term business loans
What’s a short-term business loan?
A short-term loan is a type of business finance that can be arranged quickly and paid back to the lender over a short period. A common reason for getting a short-term loan is to raise working capital to cover temporary expenses.
What’s the interest rate for short-term business loans?
Interest rates for short-term business loans differ from lender to lender, as do the methods used for calculating the interest. Rates are risk-based; the higher the risk to the lender, the higher your interest rate as a borrower. A typical interest rate ranges from 10-25% per annum (p.a.).
Can I get a short-term business loan to pay off other debts?
Yes, you can use a short-term loan to consolidate or refinance other cashflow debts. This would give you one debt to repay, with one set of terms and rates, instead of repaying various debts with different terms and conditions.
Can I get a short-term loan with bad credit?
Yes, you can still access short-term business finance if you have bad credit, although you’ll pay more in interest, and the lender may impose certain requirements for collateral or a personal guarantee. You can alternatively apply for a bad credit business loan.
1. Proprietary data of small businesses who applied for finance through Lend.com.au and have been operating for at least five years (2023).