Everything You Need to Know About Short-Term Lines of Credit

A short-term line of credit is a business line of credit with a loan term between six months and one year. With a short-term line of credit, you can draw from a pool of funds whenever you need capital. Once you pay back what you took out, plus interest, you can dip into the full amount of the credit line once more.

A business line of credit is among the most flexible options when it comes to your business loan options. A short-term line of credit, in particular, can provide your business with a quick capital injection to cover unforeseen expenses or capitalize on a new business opportunity.

This can be an ideal financing solution for small businesses that have to contend with fluctuating cash flows and that might not have a lot of collateral to offer up. In this guide, we’re going to tell you everything you need to know about short-term business lines of credit so you can determine if this is the right solution for your business’s cash flow needs.

In this guide, we’ll cover the following:

• What is a short-term line of credit?
• Short-term line of credit vs. traditional line of credit
• Where to get a short-term line of credit
• How to qualify
• How to apply

A short-term line of credit is a business line of credit with an average loan term between six months and one year. Of course, this begs the question, “what’s a business line of credit?”

A business line of credit provides a business owner access to a pool of funds from which they can draw from whenever they need capital. Unlike a term loan, you can draw from your credit line on an as-needed basis, and you’ll only repay what you use, plus interest. In this way, a business line of credit is like a more powerful business credit card.

Once you repay what you owe, you’ll have access to the full amount of credit once more.

For example, say you’re given access to a $50,000 short-term line of credit. You decide to take out $30,000 and keep the other $20,000 in the pool of available funds. If you do this, you’ll only have to pay back the $30,000, plus interest. Once you do, you’ll again have access to the entire $50,000. No need to apply for another loan to get more financing.

However, while most business lines of credit conform to this “revolving credit” format, some will not automatically renew after you’ve repaid what you owe. Instead, these lenders will require you to reapply.

Some lenders also require you to secure your business line of credit with some form of collateral, like inventory or accounts receivables. Others offer unsecured business lines of credit, requiring only a personal guarantee.

Also keep in mind that short-term lines of credit come with no prepayment penalty. However, some lenders charge draw fees (a cost for drawing funds), inactivity fees (for not using your line of credit for a certain period of time), or withdrawal minimums (where you’re required to draw a specified amount during a particular period of time).

Overall, the appeal of a short-term line of credit is its flexibility. You can dip into it whenever you need some quick capital to cover expenses like payroll or inventory.

Now that you know what a line of credit is, let’s look at the key differences between a short-term line of credit and a longer-term line of credit so you can see which might make more sense for your business. Generally, short-term lines of credit are:

• Easier to qualify for: If your business is relatively new and doesn’t have a well-established credit history, or if your personal credit score is less than stellar, getting a traditional line of credit can be tricky. Because of this, businesses will opt for a short-term line of credit to help with cash flow while building up their credit score.
• Faster to fund: In general, lines of credit fund pretty quickly. But if you’re in a hurry and/or simply don’t like dealing with paperwork, a short-term line of credit can fund even faster than a traditional one.
• More expensive: Of course, having more lenient requirements and faster funding times comes with a tradeoff. Generally, short-term lines of credit will have a higher cost of debt to compensate for the increased risk the lender is taking on. Essentially, you’re paying a premium for speed and convenience.

You can apply and receive a short-term business line of credit from a bank or from an alternative lender. A short-term line of credit will come with a specified amount of funds on your line, as well as specific repayment terms and interest rates.

Depending on your lender, a short-term line of credit can range from $1,000 to $100,000. Depending on your creditworthiness, your interest rate will fall somewhere between 7% and 25%. If you go through an alternative lender, you can qualify for a short-term line of credit in as little as 24 hours.

As you can tell, short-term lines of credit are among the most business-friendly financing options. But what exactly does it take to qualify for one? Here are the requirements for qualifying for a short-term line of credit:

The application process for a short-term line of credit is fairly simple. Just follow these steps:

The best place to go for a short-term line of credit is an alternative lender, as they will typically have the fastest application process and easiest requirements. We’ll talk more about some specific lenders to consider below.

Applications vary by lender, but you should expect to lay out some of the materials we talked about in the previous section. With an alternative lender, you should be able to submit your application online. Once the lender reviews your application, they’ll reach back out if they need additional information.

Ideally, you’ll get multiple lenders competing for your business. If this is the case, here are some things to consider when making your selection:

• How do you plan to use the funds? Are you using the short-term line of credit to stabilize cash flow? Or are you seeking to invest in an opportunity that may take a while to see returns? What you plan to spend the money on should help inform your decision.
• How quickly can you repay the funds? This is a short-term line of credit, so if you don’t think you can repay what you owe within the terms, perhaps you need to pick a lender that’s willing to offer a longer term.
• Do you have strong financials? If you have a good credit score and high annual revenue, you may be better off going with a traditional line of credit, or even a term loan. These are often cheaper and come with longer repayment terms.

Only you know what type of funding your business needs, but short-term lines of credit certainly have their advantages. They can serve as your rainy day fund, or give you access to quick cash when you need it most. What’s more, they’re among the easiest business financing options to qualify for. If you stay within your borrowing limits and repay your debt on time, a business line of credit can help you accomplish your goals, and then some.