Short-Term Financing 101: Pros, Cons, and Everything in Between - (2024)

Short-Term Financing 101: Pros, Cons, and Everything in Between

Short-term financing can be very helpful for keeping your business afloat through difficult times. However, it can also ruin you when used incorrectly. This type of financing fits a specific range of circ*mstances. You need to understand when to use it and how to choose the best online lenders that can meet your business’ needs.

Short-Term Financing: Pros & Cons

Advantages of Using Online Lenders for Startups

The most important benefit of online short-term loans is that they are much easier to get. Compared to banks, the approval process is straightforward and fast. Moreover, eligibility requirements for this financing are also rather minimal. In fact, many online lenders offer unsecured loans. Some of them will even work with clients that have bad credit. This will be most important for many businesses that are trying to get financing in the current crisis.

In terms of time, online loans are good because they can provide you with funds within 24 hours. The terms for this will vary depending on the situation. However, if you are in a pinch, this is the type of financing that will give you money fast. Bank loans, on the other hand, can take over a week to get approved.

The availability of short-term loans is another very important benefit. There is a great number of online loan providers today and their products are extremely versatile. Therefore, every business can find some type of loan that will meet their requirements. This includes unsecured loans and loans for bad-credit clients.

The versatility of options is complemented by the flexibility of short-term financing. This means that not only are there many types of loans for you to choose from. You can also find offers with highly flexible repayment terms. There are options with weekly or monthly payments and those that allow you to pay off the debt early.

Note that early repayment is an important requirement for a short-term loan. The purpose of this financing method is to offer a “quick fix” to tide your business over until the next payment comes in. Therefore, having the ability to pay the loan off early will help you save money on interest.

Disadvantages of Short-Term Financing

The main disadvantage of this financing type is that it’s very high-risk. Therefore, online lenders have no choice but to mitigate the risk in every way they can. The main solution they use is to set high interest rates.

It’s very important to be very careful when you are choosing a short-term loan and read the terms thoroughly. You can use a loan calculator to check exactly how much money the loan will cost you. Note that these loans can range from 5-15% to 200%. This means that if you aren’t careful, you might get into a contract where you’ll have to pay double the amount of the original loan. This is the kind of deal that can break any business.

The interest rate will get higher as the loan gets riskier. Therefore, short-term financing without security or for businesses with bad credit will always be the most expensive.

Moreover, remember to check the repayment terms. In some cases, it might make sense to take out even a very expensive loan. However, you should only do this if you can pay it out fast.

Another disadvantage of this financing is that online lenders aren’t as well-regulated as banks. In fact, this industry is full of frauds and their number has grown with this last crisis. Therefore, you should always run a thorough background check of the lender before taking a loan. This includes checking the lender’s credentials and contact details. Any respectable legit company will have at least one office you can contact directly.

Next, study online lender reviews and look up news about the companies. Check both professional and customer reviews to get a well-rounded picture of the lender.

Top Online Lenders in the USA in 2021

There are many online lenders in the US. But if you want to be safe and get the best terms, you should go for the leaders in the market. This means your choice will boil down to comparing Kabbage vs OnDeck. Both these companies are the leaders of the industry but their product offering is quite different. However, between the two of them, these companies cover all short-term financing options an entrepreneur might need.

Kabbage is the smaller company more oriented toward really short loans. The maximum loan term it offers is 6-18 months and the maximum amount is $250,000. Note that this lender is very innovative and also offering unsecured credit options. Kabbage is also one of the first online lenders to work within the SBA’s Paycheck Protection Program. But it must be noted that at the moment it offers only PPP loans. Hopefully, with the company’s purchase by American Express, the situation will change.

OnDeck can offer loans of up to half a million and 36 months long. However, getting a loan from this online lender will be harder as it must be secured and the eligibility requirements are more stringent. The company offers PPP loans but it also offers original loans. This is due to the fact that it was recently bought by Enova.

When to Use and When to Avoid Short-Term Financing

There are quite a few ways to finance your business and using a short-term loan should not be your first choice. In fact, this is one of the options you should keep as a “last resort” only. This is because these loans are expensive no matter the circ*mstances. Therefore, the first thing you need to do when you consider this financing option is to make sure it won’t drag you under.

This means that you need to be confident in your ability to pay off the loan quick. That’s why it’s called short-term financing. It should only be used in situations when you are stranded without cash for a limited period of time. However, having cash during this time is important enough to incur some loss with an expensive loan.

Situations when taking a short-term loan from online lenders is a good decision include:

  • Resolving immediate cash flow issues.
  • For example, if you are without the money to pay essential bills but expecting a payment within a few weeks. The primary purpose of these loans is to help with such immediate situations.
  • Making payments before you get approved for a bank loan.
  • If you have a chance at a better long-term financing option but you need the money fast, this loan can fill the gap. For instance, you can use it to make some emergency payments while the approval of a cheaper bank loan is pending.
  • Giving your business a seasonal boost.
  • It will be a good idea to use short-term financing in preparation for the holidays or some other important period for your business. But remember to take this loan only if you are confident that your revenue will be enough to pay off the debt fast.

You also need to understand that there are situations when you should avoid using a short-term loan. If your business is in a bad position with no resolution in sight, you shouldn’t take the risk. In addition, remember that you shouldn’t try to replace a long-term loan with this one. This should only be a temporary solution.

In Conclusion: Should You Get Short-Term Financing for Your Startup?

The world has changed with the pandemic and any business that wants to survive in it must follow the relevant trends. You might need money to adjust your business to work better with the changed consumer behavior. You might also need financing just to get some cash flow into the business to tide you over between payments. No matter your reasons, using the services of online lenders will be the best choice in many situations. These loans are quick and relatively easy to get. However, remember that short-term financing is also risky. You need to be sure that you can settle this debt fast before you actually take the money.

Short-Term Financing 101: Pros, Cons, and Everything in Between - (2024)


Short-Term Financing 101: Pros, Cons, and Everything in Between -? ›

One of the main drawbacks is that it can increase your financial risk and cost of capital. Short-term financing usually has higher interest rates and fees than long-term financing, and it exposes you to the risk of refinancing or rollover.

What are the risks of short term financing? ›

One of the main drawbacks is that it can increase your financial risk and cost of capital. Short-term financing usually has higher interest rates and fees than long-term financing, and it exposes you to the risk of refinancing or rollover.

What is a major advantage of using short term funds? ›

The biggest advantage of a short term loan is that, upon approval, you will often receive funds within a week. If for example, you need to make a quick payment to outstanding bills, or you need to purchase new stock quickly – a short term loan will help you meet your cash requirements immediately.

What are the advantages and disadvantages of short-term investment? ›

On the other hand, short-term investments offer greater liquidity and potential for quick returns, but they come with higher risks and require active management. Remember, investment decisions should align with your personal circ*mstances and financial objectives.

What are the disadvantages of short-term planning? ›

While short-term goals offer many advantages, they also have limitations. One potential disadvantage is the risk of focusing too much on immediate, short-term gains at the expense of larger, long-term objectives. This narrow focus can lead to missed opportunities for long-term growth and success.

Why is short term funding bad? ›

The biggest drawback to short-term loans is that they often do not adequately solve the underlying problems that cause you to need a short-term loan. In fact, with their high interest rates and fees, they often worsen the problem and become a debt trap.

What are the disadvantages of a short term contract? ›

Lack of Job Security: With temporary employment, there is the lack of long-term job security. The number of available assignments and pay rates may fluctuate, causing you to take a role that isn't suited for you and doesn't provide you with the income you were seeking.

Why do banks prefer short term loans? ›

These loans are considered less risky compared to long term loans because of a shorter maturity date. The borrower's ability to repay a loan is less likely to change significantly over a short frame of time. Thus, the time it takes for a lender underwriting to process the loan is shorter.

What is a short term financial risk? ›

This type of financial risk arises at an unexpected and relatively short time. For example, a vehicle that suddenly breaks down due to a punctured tire, so you need to spend some money to handle it. Another example is pain.

Is short term debt risky? ›

What makes these risky is the amount of the loan plus interest is due in full when you receive your next paycheck. If this amount can't be paid at that time, there are usually late fees that increase with each day of non-payment.

What should short term financing be used for? ›

The purpose of short-term financing is to help with cash flow needs during periods when cash inflows are lower. Short-term financing options, such as credit cards, also offer a convenient form of payment.

Why do companies seek short-term financing? ›

Short-term financing is usually aligned with a company's operational needs. It provides shorter maturities (3-5 years) than long-term financing, which makes it better-suited for fluctuations in working capital and other ongoing operational expenses.

What are the advantages and disadvantages of using short-term debt financing? ›

Short-Term Loans: Benefits and Drawbacks
  • Advantages of Short-Term Loans. On the positive side, short-term loans are:
  • Easy to Apply For. ...
  • Easy to Access. ...
  • Available to People with Low Credit Scores. ...
  • Disadvantages of Short-Term Loans. ...
  • High Costs. ...
  • Aggressive Repayment Timelines. ...
  • Limits on Total Amount Borrowed.
Jan 3, 2023

What are the advantages and disadvantages of a short-term versus long-term loan? ›

Short-term loans versus long-term loans

Shorter loan terms typically mean higher monthly mortgage payments, but often have lower interest rates. And if you pay off your mortgage balance within a shorter term, you may pay less in interest overall than with a longer-term mortgage.

What is an advantage of a shorter term loan? ›

There are many benefits to choosing a short-term loan for your small business. As a type of lending products favored by many small business lenders, short-term loans offer fast processing times, simplified application processes, and more lenient qualifications compared to traditional banking loans.

What are the advantages and disadvantages of a short and long-term loan? ›

The biggest drawback to a short-term loan is the interest rate, which is higher—often a lot higher—than interest rates for longer-term loans. The advantage of a long-term loan is a lower interest rate over a longer period of time.

What are the advantages of short term financial goals? ›

Setting short-term financial goals gives you the foundation and the confidence boost that you'll need to achieve the bigger goals that take more time. These first steps can relatively easy to achieve in as little as a year: Create a budget and stick with it.

What are the advantages of short and long-term financing? ›

Long-term capital is better-suited for external and internal strategic investments as well as financial risk management, in contrast to short-term capital, which is best used for every-day, operational needs.


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