How to Manage a Short-Term Business Loan

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Short-term business loans have repayment terms that are typically three to 24 months in length. These short terms mean that you’ll have to pay more with each payment to pay off your loan. You may also be required to make daily or weekly repayments, while other business loans offer monthly repayments.

Staying on top of these loan repayments is vital so that your business can stay in good standing with the lender and fully repay the loan. Learn five strategies to help you manage your short-term business loan and what to do if you run into difficulty along the way.

5 tips for managing a short-term business loan

These five tips can help you manage your loan effectively and avoid financial issues in the future.

1. Read the loan agreement

The loan agreement outlines all the terms of the loan to help you understand how repayments will work and what is expected of you. It covers everything from the interest rate you’re charged to the monthly payment amount to what happens if you miss payments.

You’ll want to read through the loan agreement ideally before you sign it. If you come across terms you don’t understand, ask the lender to explain how that part of the loan works. Some common terms you’ll want to know:

• Acceleration: If you default on the business loan, the lender can demand that you repay the entire loan amount immediately.
• APR: The amount of interest you’ll pay over the course of the year, expressed as a percentage
• Factor rate: Used in place of an APR, the factor rate is a decimal like 1.4 that gets multiplied by the entire loan amount at the beginning of the loan.
• Late fee: The fee you’re charged if you’re late on a repayment
• Principal: The amount of the loan that you’re receiving to use for business expenses. Interest is calculated on this amount.
• Prepayment penalty: A prepayment fee charged if you pay off the loan early. Not all loans charge this fee.
• Repayment term: The length of time you’ll make loan repayments until the loan is paid off

2. Budget to ensure you can afford loan payments

Next, you’ll want to prioritize loan repayments in your budget by adding them as an expense. If you haven’t signed for the loan yet, you can estimate loan repayments using a business loan calculator. Consider taking on only the amount of funding you need to cover a specific business purchase — and no more. It can be tempting to accept the entire loan amount the lender offers, but doing so can put you in a tight spot financially. If you can’t make the repayments, you risk defaulting on the loan.

You’ll also want to ensure that you can make the loan repayment during both good and slow seasons of your business. If your revenue dips unexpectedly, consider which expenses you can cut or find ways to increase revenue so that you can cover the loan repayment.

You want to ensure that you don’t fall behind on loan repayments. Budgeting can help you see how the loan repayment will fit into the overall picture of your business’s finances.

3. Make payments on time

On-time payments account for 35 percent of your personal FICO score and can affect your business credit score. As short-term loans have shorter repayment periods than other business loans, you’ll need to prioritize making those payments on schedule.

You can do so by setting up autopay, which will automatically withdraw from your business bank account to make the loan repayment. This way you won’t incur late fees simply because you forgot the due date or forgot to pay manually.

4. Avoid taking on other debts

If you take on other debts while repaying your short-term business loan, it can become difficult to keep up with payments. You’ll be on the hook for making repayments on multiple loans, decreasing your business’s profitability. And since these loans are short-term loans, your payments are likely higher than long-term business loans. Having multiple high-dollar loans increases your risk of getting behind on payments if you lose revenue at any time during the loan terms.

If your business needs additional funding during your repayment period, consider alternatives to short-term business loans or other types of financing before taking on new debt.

5. Stay in touch with your lender

Communicate with your lender immediately if you experience financial hardship and will have difficulty making one or more loan repayments. The sooner you communicate your concerns, the more likely your lender will be willing to work with you to find a solution. Your lender may be able to offer these options to help you make your repayments:

• Deferred payments or forbearance: The lender may allow you to miss one or more payments until your business can resume making repayments.

• Refinance your loan: It may help you by refinancing your loan to extend the loan terms. This option will lower the amount of your repayments.
• Debt settlement: The lender may accept a one-time repayment of less than the total amount that you owe. While this option will give you debt relief, it will also significantly affect your credit.
• Debt consolidation: You may be able to get a debt consolidation loan if you’re struggling to keep up with repayments on multiple loans. This loan will combine multiple loans into one large loan with a single repayment.

Types of short-term business loans

Exploring your options ensures you get the right short-term loan for your business. Here are some of the most popular types of short-term business loans.

The bottom line

Short-term business loans are a good option for fast funding if you manage them correctly. You’ll need to add the short-term loan repayment to your business budget and prioritize making payments on time. You’ll also want to ensure that you understand all the terms in your loan agreement so that you know how repayment works.

If you experience financial hardship during your loan period, contact the lender directly to arrange a new repayment plan. Following these guidelines can help you effectively manage your short-term business loan until the loan is paid off.

Frequently asked questions about short-term business loans

• Does a short-term business loan hurt your personal credit?

  Short-term business loans could hurt your personal credit if missed payments are reported to credit bureaus or you default on the loan. If you signed a personal guarantee, your personal assets could also be on the line.

• What should I consider when choosing a short-term business loan?

  Before choosing a short-term business loan, consider the loan terms, fees, monthly payments, and repayment periods. Compare loan offers from multiple lenders to find the best and most cost-effective option for your business.

• What is the minimum credit score required for a short-term business loan?

  Most bank lenders want to see a personal credit score of at least 670, while online lenders accept a lower score around 600. It is possible to get a short-term business loan with a credit score of 500 from an alternative or online lender.