When you need instant money to fund your business expenses, quick business loans can come in handy. They are also called same-day business loans because of the fastest approval. If your business needs money to fund small unexpected business expenses, you can think of applying for them. Lenders will check your business credit history and profitability to assess your repayment capacity.
Getting approval for quick business loans is not a cinch, but you will have to prove that your business will struggle to repay on time. If you do not have a separate business credit score, your personal credit report will be thoroughly checked. These loans are not pledged by your business or personal assets and repaid over an extended duration.
What are the types of quick business loans?
Fast business loans have been designed to help entrepreneurs access funds without further ado. You can get these loans within two or three days. The most common types of fast business loans include but are not limited to
A merchant cash advance
It is aimed at businesses with a large volume of debit and card sales. It refers to the amount of money that you borrow on projected future card sales, which are calculated based on your previous months’ sales.
You pay back the borrowed sum in the form of a fixed percentage of daily sales. Note that the total repayment amount is calculated by multiplying the factor rate, ranging between 1.1 and 1.5, by the borrowed sum. When you do not make any sales, you do not have to pay anything.
Short-term business loans
Short-term business loans are aimed at funding small business expenses when you are struggling with a temporary cash flow. These loans include working capital loans, bad credit business loans, and business loans for women.
These loans enable you to borrow a lump sum to be paid down over an extended duration. Interest rates for these loans will be high in case of a substandard credit rating.
Invoice financing
This is the best method to meet temporary cash flow problems. It is ideal for those companies that sell their products on credit. It is not an uncommon trend among customers to make late payments. It can impair your capability to make payments to your suppliers.
An invoice financing company will provide you with funds almost the same day. They will fund 85% of unpaid invoices, and the remaining balance is paid after collections from customers. Invoice financing companies charge fees, not interest rates.
Lines of credit
A line of credit enables you to access money immediately as and when you need it. It is way better than business loans as you do not have to submit an application. You will have a withdrawal limit.
You can withdraw money anytime you need it up to the maximum limit. Interest is paid only on the unpaid balance, meaning you can pay it back in instalments. You are free to use the repaid amount again. It is a revolving credit.
What is the cost of fast business loans?
The speedy processing is an attractive thing about fast business loans, but they are expensive. It is not interest rates that determine the total cost of these loans. There are other factors too. Interest rates for these loans vary between 6% and 24% depending on your credit history and profit stability. Merchant cash advances are not loans and therefore they do not charge interest rates, but they are still very expensive because of factor rate. You will most likely find other business loans less expensive.
Hidden fees
In addition to interest rates, these loans are subject to hidden fees. They include processing fees, origination fees, and early and late payment charges. While comparing the loan cost, you should focus on the APR rather than interest rates. The APR includes interest rates along with fees and charges.
Short repayment terms
Most of the small business loans come with small repayment terms, usually between 6 months and 18 months. Daily or monthly payment schedules can strain your cash flow. This is especially true for seasonal businesses. Chances are you end up borrowing again.
Personal guarantees
While small business loans are unsecured, lenders require you to sign the personal guarantee, which holds you accountable for the debt personally when your business fails. Your personal assets are at risk then.
What is the risk of fast business loans?
There are some risks related to small business loans:
- Your business can get trapped into an ongoing cycle of borrowing if debt payments strain your cash flow. The risk is high when you borrow money with a subprime credit history.
- It could be difficult to cover operation overheads especially in case of a merchant cash advance.
- Missed payments and defaults will increase the cost of the debt. Eventually, you will find yourself trapped in an insurmountable debt.
- These loans do not fuel business growth. They are just aimed at funding temporary cash flow gaps.
- High interest rates quickly drain cash, leaving you with little capital to invest in expansion.
When do fast business loans make sense?
Though they are subject to some risks and limitations, quick business loans could be an ideal choice when:
- You need money to cover unexpected expenses.
- You want to grab an opportunity, and cash is short.
- You want to fill a gap in cash flow.
To wrap up
Fast business loans can be fruitful when cash is tight, but the convenience they offer could trap you into an ongoing cycle of debt. While they can fund a temporary cash flow gap, you should rely on them only when you know you can repay the debt without struggling with meeting day-to-day business expenses.
FAQs
Can fast business loans improve my credit score?
Yes, they can build your business credit profile if payments are made on time. Late or missed payments will hurt your business and personal (if your business is not a separate legal entity) credit score.
Can I take out fast business loans if I am self-employed?
Certainly, you will need to prove that your business has the potential to repay the debt. Lenders will assess your bank statement and tax return.
What industries are fast business loans suitable for?
Restaurants, retail, ecommerce and service-based businesses find these loans suitable.
What are the alternatives to small business loans?
Business credit cards and business lines of credit are alternatives to quick business loans.
What happens if your business shuts down before the loan is repaid?
You would be personally liable if you signed a personal guarantee. In the absence of it, lenders will pursue your business assets to recover funds.