Many business loans are substantial, long-term commitments that come with a mountain of paperwork to wade through and complicated lending terms that are foreboding for business owners that only need a reasonable amount of extra money for a limited period.
While long-term business lending is intended to cover expansion requirements, buying out a competitor or for another critical need, short-term business loans are suitable for businesses that have some immediate expenses or ones that are upcoming over the next few months. The typical shorter loan period is repayable over a 12-month period, although there are some that run longer than this to provide a bit more time to repay.
Which Businesses Can Access a Short-term?
In this first instance, short-term business loans are available to UK businesses registered as a limited company, operate as a sole trader, or as an incorporated partnership. For companies, they must be registered with Companies House as a UK company with its company filings being up-to-date.
Most lenders will want to see at least one year of business operations (often longer), with the most recent yearly statutory accounts filed with Companies House confirming a 12-month turnover that exceeded £100,000. While a short-term business loan is often unsecured, being a homeowner is usually a plus. The debt obligations of the business must be manageable at their current levels – preferably with a good deal of slack to afford the additional repayments of a short-term loan – and the director shouldn’t have any outstanding creditors from a previous business either.
See https://www.merchantmoney.co.uk/small-business-loans/short-term-business-loans/ for a guide on the application specifics for small business owners looking for short-term funding.
How Much Can Be Borrowed?
The maximum loan amount depends on the lender’s policies and loan criteria. A business that’s only been operating a year with limited profitability will not be offered as much as a more established business with a million-pound turnover and six-figure profitability every year.
Short-term small business loans fall between the £3,000 and £150,000 range, which keeps the repayments reasonable and the total interest and closing costs affordable.
Best Uses of a Short-term Business Loan
Managing the demanding cash flow requirements of a company is tricky. There are times accountants make a mistake or omit some important upcoming expenses, which leaves an unexpected hole in the accounts that must be filled. It’s a situation that usually can be traded out of using future profits to fill in the hole where the miscalculation was made, but in the meantime, the company faces the likelihood of running below a zero balance until they can recover. To ensure they can keep trading profitably, a short-term loan is a useful, structured way to deal with the issue rather than using an overdraft facility that often seems to work like quicksand; the more you use it, the deeper you sink.
A lower than expected seasonal sales season can cause a problem with balancing the books through the worst periods of the year. With a company that is showing positive signs of sales growth the rest of the year but is suffering through their usual seasonal dry spell, a short-term facility makes sense to survive the period and use upcoming profits to pay off the loan a few months’ later.
Expanding staff or larger facilities to handle a surge in business where the cash flow drags behind the gross sales is another area where a long-term lending facility won’t make much sense, but a 12-month one certainly does. Having enough staff on-hand improves morale while the business is under strain from rapid expansion. Similarly, opening an annex or taking over the next-door office helps to manage staff numbers ahead of the rise in profitability.
When Is the Wrong Time to Take Out a Short-term Loan?
Taking out a short-term loan for a business that’s declining isn’t the smartest move. There’s no telling whether the sales decline is going to continue when it’s not due to known seasonality reasons. It is best to survey the customers (especially the ones not buying the product or service) to determine what is causing them to pass on your offer? Then fix the problem.
A company that is perennially short of working capital won’t benefit much from a short-term facility because unless the fortunes of the business improve in the short-term too, it will be ill-equipped to repay the loan in time. Taking out a new lending facility to repay the first one won’t work like it does with a credit card minimum payment because short-term loans are not necessarily paid in full all on the back-end.
There should always be sound, well-considered reasons for taking out any lending facility. Otherwise, it’s an expensive way to meander along in a business being unsure what to do with the extra cash. More money and no plan surely are a bad idea, especially for a company that will need to repay the loan, plus interest, inside of a year or less. Borrowing prudently is the best idea.