Short-Term Business Loans: What Criteria Do You Need to Meet?
Short-term business loans can be a viable option when you need money to meet day-to-day operational overheads or expand your business. These loans have been designed to help meet unexpected financial needs. They are also called fast short-term business loans in the UK because the approval decision is made faster than other types of business loans.
These loans offer a small amount of money to be repaid over a year. As compared to other business loans, they follow less stringent criteria. Since they have been designed to address immediate financial needs, they are more often than not approved the same day.
Though short-term business loans follow less stringent criteria, it does not insinuate that they are easy to qualify for. Lenders typically require proof of business stability, a strong business credit score, consistent turnover and profitability, and complete documentation such as tax returns. Meeting these criteria increases approval chances and helps secure favourable loan terms.
What criteria do you need to meet to qualify for short-term business loans?
Here are the factors that lenders take into account while deciding on your application for short-term business loans;
- A good credit score
Most lenders approve applications for short-term business loans when the credit scores of borrowers are decent. However, the exact requirement varies by lender. Your credit score informs lenders how risky you are. It demonstrates your reliability in repaying debt. Your approval chance will certainly be higher if your credit score is decent. Lenders feel more confident about your repayment ability when you have met all your obligations in the past.
Bear in mind that your lender will take into account your business credit score. In the absence of it, they will refer to your personal credit rating. Implications of a good credit score are not limited to affordable interest rates but also include qualifying for a higher loan amount and more flexible repayment schedules.
- A personal guarantee
If your business is small, new and does not have strong financial condition, lenders might require a personal guarantee. A personal guarantee holds you accountable to settle debt in case your business fails to do so. Small business loans are unsecured, and therefore lenders want to be assured that the owner will pay off the debt if the business cannot repay.
Even if your business has a business credit report, a personal guarantee authorizes your lender to check your personal credit report as well, giving them more confidence in assessing the risk involved in loaning you.
Lenders require a personal guarantee in the following cases:
- Your credit history is thin, or your credit score is less than fair.
- Your business has a trading history of less than two years.
- You operate in a high- risk industry.
- Your turnover is not so high.
After signing a personal guarantee, your personal assets are at risk in case your business fails to discharge the debt. Credit inquiries will affect your personal credit score along with a business credit score. Lenders will also have the right to directly pursue you in case of default.
- A trading history
Not all direct lenders require you to have a long trading history, but it improves your chances of securing a business loan at competitive interest rates. The trading history matters because it helps lenders identify that your business has survived despite the ups and downs in your financial condition.
Another benefit of a longer trading history is that it proves a steady cash flow. It measures your repayment capacity. Businesses with at least two years of trading history are considered less risky than those that have spent only a year.
Banks generally accept applications from businesses with at least two years of trading history. However, lenders are more flexible. They can accept your application even if the trading history is less than a year, provided you have already reached the breakeven point.
- Turnover
Turnover requirements vary by lender. In order to qualify for a small business loan, a lender will require you to have a high turnover. Consistency is the key. It ensures that your business has a great cash flow to help you clear your debts on time.
Do not forget that lenders will take into account your debt-to-income ratio. Your business must not owe more than 40% of turnover because this will make it complicated for you to manage payments and other business expenses. In addition to turnover, lenders will consider cash flow.
A healthy cash flow improves your chances of getting a short-term business loan approved faster.
The bottom line
In order to qualify for short-term business loans, you need a high turnover, a good credit history, and a high turnover. Since these loans are unsecured, which increases the risk for a lender, they might ask you to provide a personal guarantee.
FAQs
- What documents do you need to apply for a short-term business loan?
You will need the following documents:
- Audited cash flow statements of one to two years
- Income tax returns
- Bank statements of the previous six months
- What are the common reasons for the rejection of a short-term business loan?
Here are the reasons why applications for small business loans are refused:
- A low personal or business credit score
- A low or insufficient turnover
- An inconsistent cash flow
- A high existing debt obligation
- Incomplete or inaccurate documentation
- What are the alternatives to short-term business loans?
If you somehow fail to qualify for a short-term business loan, you can consider the following alternatives:
- A business line of credit – you can borrow money as and when you need, based on the maximum limit. Unlike credit cards, money can be paid back as per your convenience. Interest is accrued only on the unpaid balance.
- Invoice financing – this is an ideal solution for those who have to collect payments from accounts receivable. This helps fund day-to-day business operations.
- Working capital loans – small business working capital loans help businesses finance day-to-day business expenses when cash flow is tight.
- A merchant cash advance – a merchant cash advance is an ideal solution for companies with a high volume of card sales and need funds to fix temporary cash gaps.
Lee Copper is an experienced financial content specialist helping businesses explore the UK loan market. He writes guides led by experts on business loans and finance products. His work follows strict editorial values to ensure reality, applicability, and simplicity for readers to make well-versed financial decisions. Lee creates in-depth guides backed up by research, industry best practices, and the latest market developments.
