A recent study found that 82% of failed small businesses list cash flow as a factor in their closure!
With growing business competition, access to quick capital can make the difference between growth and closure.
Short-term business loans provide a solution for immediate funding needs.
But how exactly do short-term loans work, and what should business owners be aware of before applying?
This guide explains everything Australian businesses need to know about short-term business loans, including their benefits, potential risks, and key considerations.
What Exactly Are Short-Term Loans?
A short-term business loan is a type of financing designed to be repaid within a relatively short period—typically within 3 to 18 months. These loans are often used by businesses to cover temporary cash flow gaps, pay off urgent expenses, or invest in immediate opportunities.
These loans have repayment periods ranging from 3 to 24 months. Lenders charge higher interest rates due to the increased risk and shorter repayment timelines.
The approval process is faster because lenders focus on recent business performance rather than long-term projections. Most short-term lenders use automated assessment systems to evaluate applications, enabling decisions within hours.
Types Of Short-Term Business Loans
| Loan Type | KEY Feature | Best For |
|---|---|---|
| Line of Credit | Revolving credit facility, draw funds as needed | Managing cash flow gaps |
| Invoice Financing | Advance of 80-85% of invoice value | Businesses with long payment terms |
| Merchant Cash Advance | Daily repayments as percentage of card sales | Retail and hospitality sectors |
| Equipment Financing | Loan secured against purchased equipment | Purchasing business equipment |
- Line of Credit facilities let businesses draw funds up to a pre-approved limit. You only pay interest on the amount used. Repayments replenish your available credit. To read more about Line of Credit Click Here.
- Invoice Financing helps businesses access funds tied up in unpaid invoices. The lender advances most of the invoice value immediately. When customers pay, you receive the remaining amount minus the lender’s fees.
- Merchant Cash Advances suit businesses with steady card sales. The lender provides upfront capital in exchange for a percentage of future card transactions. This ensures repayments align with your cash flow.
- Equipment Financing helps purchase business equipment. The equipment serves as collateral, often resulting in lower interest rates compared to unsecured loans.
How Do Short Term Business Loans Work?
Short term business loans usually involve a straightforward application process, minimal documentation, and faster approval times.
Once approved, the business receives a lump sum of money, which is then repaid through regular instalments (weekly or monthly), along with interest.
The primary features of short term loans include:
- Loan Amount: Typically ranges from $5,000 to $500,000, depending on the lender and the business’s financial health.
- Repayment Term: Varies from a few months to around 18 months.
- Interest Rates: Can be higher than long-term loans due to the shorter repayment period.
- Funding Time: Approval and funding can occur in as little as 24 to 48 hours after the application is submitted.
Benefits Of Short Term Business Loans
Quick Access To Funds
Most lenders complete assessment within 24 hours. Fund transfers occur on the same day as approval. This speed helps businesses capitalise on time-sensitive opportunities or handle emergencies.
Minimal Documentation
Lenders focus on recent bank statements and basic business information. They rarely require detailed business plans or years of financial records. Online applications and digital document submission streamline the process.
Flexible Use Of Funds
Unlike specific-purpose loans, short term business loans allow for varied use. Common uses include:
- Buying inventory to fulfil large orders
- Covering wage payments during slow periods
- Funding marketing campaigns
- Renovating business premises
- Purchasing equipment for business expansion
Eligibility Requirements For Short-Term Business Loans
Lenders assess applications based on:
- Time in business – minimum 6 months of operation shows business stability
- Monthly revenue – proves ability to repay the loan
- Bank statements – demonstrates cash flow patterns
- Credit history – indicates past financial behaviour
Many lenders have minimum monthly revenue requirements:
- Smaller loans ($5,000-$25,000): $5,000 monthly revenue
- Medium loans ($25,001-$100,000): $15,000 monthly revenue
- Larger loans ($100,001+): $25,000+ monthly revenue
How To Apply For A Short-Term Business Loan?
Required Documentation
Prepare these documents for a smoother application:
- Bank statements – last 3-6 months
- Business tax returns – most recent
- Profit and loss statement – shows business profitability
- Business plan – for larger loan amounts
Lender Comparison Factors
Assess potential lenders based on:
- Interest rates and comparison rates
- Upfront and ongoing fees
- Repayment flexibility
- Customer support availability
- Reviews from other businesses
Key Considerations Before Applying For A Short Term Business Loan
Though short term loans may offer some advantages, some crucial considerations must be kept in mind before seeking them. Knowing the considerations makes the firm choose the right and prevents the firms from falling into pitfalls.
1) Higher Interest Rates
Lenders prefer to see stability in your business. Making major changes to your business, such as altering your business model, product line, or management, just before applying for a loan can create uncertainty. It’s best to apply for a loan when your business is stable and you can show consistent performance.
2) Frequent Repayments
Paying back is mostly done regularly, in weekly or monthly cycles. With such regular payments, companies require stable cash flows. Late payment incurs some extra charges and affects the credit scores adversely.
3) Loan Amount Limitations
Short-term loans are normally offered in smaller amounts compared to long-term loans. As much as this may suffice for a minor cash flow problem or a minor investment, companies that require more significant amounts have no choice but to look for other alternatives for financing.
4) Potential Fees
Many lenders are charging origination fees, late payment fees, or early repayment penalties. Reading fine print is essential to understand all costs that come with the acceptance of the loan.
5) Impact On Credit Score
Short-term business loans will have the same effects on any loan taken. Failure to pay on time affects the credit score of the business. The business is less likely to secure future financing as its credit score deteriorates due to missed and delayed payments.
When To Consider A Short-Term Business Loan?
A short term loan for your business should be taken when:
- There are Gaps in Cash Flows: When a business is seasonal and has gaps in cash flows, it would also require a short term loan to bridge operating expenses until revenue begins picking up.
- Unexpected Expenses: If suddenly, you face some unexpected expense in your business, like equipment repairs or just some emergent-related expenditures, short term lending will give you fast relief.
- Small Investment: For example, perhaps you want to invest small amounts in stock, or possibly in equipment and marketing, a short term loan will give you that funding without tying you long-term to debt.
- Weak Credit History: Your business does not necessarily need to have a very long credit history if you do not have a good credit score. It is easier to secure a short-term loan than a long-term conventional loan.
Also Read This: How Much Can I Borrow for a Short Term Loan in Australia
Get Started With Your Short-Term Business Loan Today!
Need to get quick and sure finance to meet your business needs? Knote has a flexible and fast solution for Australian business owners. Whether your business requires operational expenses, inventory purchase, or cash flow management, short-term business loans give access to funds quickly by a simple and hassle-free process. Apply now and get the support you need to keep your business running.
