Short-term Business Loans

A short-term business loan is a type of secured or unsecured business finance. They are often used by small businesses to cover sudden expenses or to capitalise on a limited-time business opportunity, and are highly popular with seasonal businesses in Australia.

Terms are generally between one month and three years. These loans are often used when a business needs fast approval on finance and can demonstrate an ability to pay it back quickly.

There are two types of short-term business loans: Secured and Unsecured. A secured loan uses an asset — such as residential property — as a guarantee on the loan, while an unsecured loan does not require any security (also known as ‘collateral’).

The business will agree to repay the loan amount plus interest over an agreed term. The best loans will allow you to repay the loan amount early and without penalties.

In some cases — such as renting or purchasing assets for long-term business use — you may want to consider applying for equipment finance.

Not sure whether a short-term loan or a long-term loan is best for your business? Below, we'll discuss some of the key points of both types of finance so you can compare your options.

Short-term finance

Short-term business loans between 1 month and 3 years are often used by established businesses to cover sudden expenses — e.g. buying extra stock, paying a tax bill, or covering fluctuations in revenue — and can be either secured or unsecured.

Using short-term finance for major investments is a risky and expensive strategy, however, and could leave you struggling to meet your repayments.

Interest or factor rates on short-term business finance are usually higher than long-term facilities, making them a very expensive option if not repaid swiftly.

If you're considering short-term finance for your business, you'll want to compare lenders to get the best deal available. When comparing lenders, there are three important aspects to consider:

• The loan amount
  

• The interest rate
  

• The fees or charges for your loan
  

Long-term finance

Long-term business loans (loans of three years or more) are often used for financing major business purchases, such as vehicles, assets, and equipment, and will generally require security by the lender.

Using long-term finance for short-term business needs could leave you with an expensive facility even if you no longer need it.

Here’s what you need to know about long-term finance:

• Long-term finance facilities tend to have lower interest rate, but the interest compounds, and you’ll end up paying more interest overall than on a loan with a shorter term.
  

• Some long-term facilities have break penalties, which means you could pay substantial fees if you wish to make additional payments and terminate the loan early.
  

Many long-term business finance facilities require security. Your lender will have a legal interest in any assets you offer as collateral for a secured loan, so you will no longer be able to sell or replace them without getting approval from the lender first, which could be a slow or complicated process.

Type of Business: Retail

Loan Amount: $50,000

A retail business has been working hard for a number of years to operate in the same area as a competitor. Through hard work, persistence, and providing excellent levels of service, they are able to compete at a higher level than their rival retail store.

The competitor announces they are entering liquidation, and will be selling their remaining inventory at a heavily discounted price — but only for a few days.

To maximise on the opportunity and secure the discounted inventory, the owner of the retail business takes out a short-term business loan to access immediate funding and close the sale on the remaining stock.

As the inventory is heavily discounted, the retail business greatly increases its profit margin on each sale, and the loan is able to be repaid in full before the end of the loan term. The following year, the influx of sales and new customers boosts both the retail store’s profile and profits.

Want us to do the calculations for you? Using our quick-and-easy business loan calculator, you can see the total repayment and interest amounts on any business loan in Australia.

Qualifying for a short-term business loan is very simple — if your business bank statements illustrate an ability to comfortably repay your desired loan amount within the agreed loan term, you will qualify for approval. It really is that simple!

Most lenders will be able to provide options if you:

• Have been trading for at least 12 months; and
  

• Have an ABN; and
  

• Are registered for GST; and
  

• Have a clean credit history; and
  

• Own property or can provide a 20% deposit
  

If you don’t meet the above criteria, you can still get approved if you:

• Are self-employed or a sole trader
  

• Have been trading for between 6 - 12 months
  

• Have an imperfect credit history
  

• Do not own property
  

There are two main types of applications, which will depend on the amount you wish to borrow. If you are borrowing less than $100,000 the approval process will be fairly simple and you will likely be approved on the same day.

Most times, just your business bank statements will be sufficient to illustrate your monthly business revenue.

If you wish to borrow more than $100,000, your lender will require additional documentation to assess your application.

If this is the case, you’ll need to provide additional documentation to the lender so they can better assess your application. Here are some tips to improve your chances of getting approved.

If you are borrowing less than $100,000:

• Proof of identity
  

• An ABN and GST registration
  

• An acceptable credit rating — the lender will ask to conduct a credit check
  

• Business bank statements
  

• Trust Deed if the business is held in a trust
  

• Australian Tax Office (ATO) Portal access.
  

If you are borrowing more than $100,000:

• All the documentation provided if borrowing less than $100,000; and
  

• Financial records (provided by your accountant)
  

• Profit and Loss Statements
  

• Balance Sheet
  

If you are making an application for more than $100,000, you can speak to your bank or a lender directly to discuss your financial circumstances and need for finance.

If you are applying for less than $100,000, you can generally apply online with a number of different specialist business loan lenders, including those who provide short-term business loans designed specifically for SMEs.

Lenders will assess an application based on the monthly revenue of the business, its intended use for the loan, how the loan will benefit future business revenue, and more.

Each lender will have different approval criteria, but here are some tips to improve your chances of getting approved.

• Demonstrate an ability to service your business loan or lease.
  

• Meet the lender's criteria for acceptable credit rating
  

• Meet the lender's criteria for minimum turnover and maximum debt
  

• Provide profit and loss statements and your business balance sheet
  

• Provide details of the asset you wish to purchase
  

• Provide read-only access to your business bank statements
  

• Provide a personal guarantee by the director of the company
  

You can use the Money.com.au smart form to compare loan offers from real Australian lenders, and apply directly for a short-term business loan online with a number of specialist lenders. These lenders offer the fastest approval speed in return for charging higher interest rates than a bank.

The number one reason a short-term business loan application will be declined is because your business financials do not illustrate an ability to service the loan amount.

You can strengthen your application by providing a lender with a business plan — a detailed plan showing how you plan to use the funds and meet your repayments.

There may be other factors that influence a lender’s decision to decline an application, including:

• A bad credit rating — i.e. a business owner or director has bad credit
  

• Limited customer base — i.e. your revenue is too dependent on a small number of customers
  

• Poor projected growth — i.e. the outlook for your market sector is poor and your business may struggle to meet repayments over the term
  

• A new business — i.e. your business hasn’t been operating for long enough and a lender cannot accurately assess your revenue
  

If you have a bad credit rating or cannot provide sufficient documentation, there may still be finance options available to you.

Consider seeing if you qualify for a low-doc business loans (if you are running a new business) or a bad credit business loan (if you have existing defaults on your credit file).