Over 40% of all small businesses applied for some type of business loan in 2019.
If you’re a small business, especially if you’re just getting started, odds are you’ll have to borrow money to meet your financial needs at some point. But that isn’t a bad thing. You just have to be smart about how much you borrow and from where.
That’s why we’ve put together this guide to help you learn how to secure your first short-term business loan.
So let’s get started!
What Is the Difference Between a Short-Term Business Loan and a Long-Term Business Loan?
The main difference between a short-term and long-term business loan is the length of the repayment period.
For example, while you can have five to 10 years to pay off a long-term business loan (and sometimes even longer), you’ll only have a few months or a few years to pay off your short-term business loan. The exact timeframe will vary depending on the lender you choose, but before you apply for a short-term loan, you have to make sure you can pay it off quickly.
You also can’t borrow as much money with a short-term loan. Since you have to pay it back fast, the amount will be lower than a long-term loan.
Come up With a Detailed Plan
Before you apply for any type of loan, you should come up with a plan that details how much money you need and what you’re going to spend it on.
Start by asking yourself these questions.
Why Do You Need a Loan?
You should never borrow money without knowing exactly why you need it. Otherwise, you could end up spending that money unwisely.
It’s a good idea to get a short-term loan to cover the following:
- Hiring seasonal employees
- Marketing expenses
- Emergency repairs
- Paying off a different loan with higher interest rates
- Buying inventory
- Improving your business’s credit score
- Maintaining cash flow
If your building has seen better days, it can also be worthwhile to get a short-term loan to improve your business’s curb appeal. You can use the loan to repaint, apply brick stain, do landscaping, install signage, etc.
It will attract more customers and establish you as a reputable and trustworthy company.
How Much Do You Need?
Once you figure out what you plan to do with the money, spend some time figuring out how much those projects will cost altogether. That is the amount you should borrow.
Don’t borrow more money than you need. Otherwise, you’ll have a harder time paying it back off.
How Will You Repay It?
After you secure the loan, you have to have a way to pay it back off again—and on time. Figure out how much money you’ll pay off every month and how long the entire amount will take. Don’t forget to add interest.
If you don’t have the means to pay back a loan, you might not be ready to borrow money.
Applying for the Short-Term Business Loan
Now that you have a plan, you’re ready to start applying for short-term business loans. This process might seem complicated and overwhelming, but if you take your time and do your research, it won’t be as hard as you think.
Here’s what you should do to get ready for your loan application.
Find the Right Lender
Applying for any kind of loan starts with finding the right lender.
It’s a good idea to start with your bank, but you can also find lenders online, credit unions, community lenders, and other programs. Do some research on each option to figure out which one best fits your needs.
Gather All the Documents You’ll Need
You should also gather all the documents you will need during the application in advance. This will make the process much faster and easier.
Here are a few things you should gather:
- Personal and business tax returns (this will show the lender how much your business makes)
- Any legal documents, such as your business license and/or registration (this will prove your business is legit and legal)
- Your business plan (this will show the lenders your business is organized, has goals, and has a detailed step-by-step to reach those goals)
- Pro-forma balance sheet (this will show the lender what you plan to do with the money and how your business will change after you get it)
If you don’t have some of these documents, like a business plan, focus on getting them first. A lender might not approve your loan if they aren’t confident in your business.
Don’t apply for a short-term business loan with the first lender you find. Spend some time “shopping around” and talking to several different lenders.
This will help you find the best loan terms with the lowest interest rates. Going with the first lender you find might seem easier at first, but it can make repaying the loan harder and more expensive.
But before you apply with any lender, make sure you do your research.
You want to make sure the lender you choose is reputable and reliable. Otherwise, you could end up in a lot more trouble.
How to Secure Your First Short-Term Business Loan
If you’re getting ready to apply for your first short-term business loan, make sure you follow the tips on this guide. They’ll ensure you get the best loan with the best rates.
The most important thing to remember is to take your time and do your homework. Just like how the lenders will be looking into your business, you should look into any lender you apply with as well.
Want to learn some other helpful tips about business loans?
Make sure you check out the rest of our blog!