Five Types of Short-Term Business Loans

As businesses grow over time, their needs are bound to evolve. As a result, companies may find themselves paying for considerable costs in the name of growth and development. In which case, they may periodically need to take out loans to address specific needs or to finance initiatives.

In the United Kingdom, short-term business loans are the most common financial instruments available to companies.

As the name suggests, this is a quick – even immediate – inflow of cash required for any number of expenditures, including hiring sprees, purchasing operational equipment, or even repairs and maintenance. The “short term” in the name also refers to the amount of time required for repayment. This usually runs between a month to as long as two years.

What Short-Term Business Loans Are Currently Available?

In the United Kingdom, companies may avail themselves of four kinds of short-term business loans. These are traditional term loans, lines of credit, merchant cash advances, and invoice financing.

What makes each one unique, and which one works best for you?

1. Traditional Term Loans

These require borrowers to repay the loan amount through regular installments over a set period of between a month and up to two years. While similar in nature to long-term loans, these actually help businesses improve their cash flow.

This is made possible by being able to fix these repayments, which allow businesses to schedule these throughout the repayment period.

2. Credit Lines

These may come in the form of standard lines of credit or as bank overdrafts and credit cards. It is assumed that all three of these options have a fixed maximum limit. The key advantage of a credit line is that it is easy to apply for and arrange.

Repayment is also easier. Lines of credit do not require a fixed payment schedule, and borrowers only have to pay interest on the amount of credit actually used.

3. Merchant Cash Advances

Getting a merchant cash advance means your company is given a set amount without depending on a fixed repayment schedule. For this type of loan, lenders automatically take the payment from the borrower’s income through their PDQ machines.

Cash advances are among the more popular loan types. This is because the loan term is so flexible, and repayments are dependent on the borrower’s income.

4. Bridge Loans

Bridge loans are short-term loans that come with an extended repayment period. Compared to traditional term loans, bridge loans are designed to help companies bridge their short-term cash flow needs until they are able to receive more permanent forms of funding.

Repayment is made easier as well, as bridge loans require borrowers to pay back the borrowed amount through fixed installments over a period of up to two years. What makes this alternative different from commercial financing is the fact that the financing amounts are bigger compared to merchant cash advances, for example.

Bridge loans are often used when businesses are refinancing or restructuring their existing term loans. You can read more about bridge loans here: to learn more about how this kind of short-term business loan can help grow your business.

5. Invoice Financing

This is the most complicated of the four types of short-term business loan. In this case, the loan essentially unlocks what funds the borrower has tied up in business invoices instead of depending on any income they stand to earn in the future.

Lenders who offer invoice financing buy the invoice and provide a loan equivalent to around 85 per cent of its total amount. Note that the lender will keep the remaining fifteen per cent of the amount as their fee.

Also, invoice financing comes in two forms: invoice discounting and invoice factoring. Invoice discounting is when the borrower shoulders the responsibility of getting the funds for their invoice. On the other hand, invoice factoring is when the lender opts to contact the borrower’s clients to collect any payment due.

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