How Do Short Term Loans Work? 5 Aspects You Should Learn About

Financial emergencies can be unpredictable. They can strike anyone and any business at any particular time. It’ll be even worse if they strike and you don’t have enough personal finance to take care of the emergency.

Fortunately, you can take out a short-term loan since it’s relatively quick; hence fit for your current financial situation.

But identifying which type of short-term loan is right for you can be challenging, especially if you have little or no knowledge about these loans.

Perhaps learning about the different types, how they work and their advantages and disadvantages will help you make informed decisions on the right type for your personal or business needs, right?

Well, this guide contains everything you need to know about the most common short-term loans. Please read on.

Payday Loans

These are simply short-term emergency loans that need to be repaid within the shortest time possible, perhaps when you receive your paycheck.

Unlike most of the short-term loans listed here, payday loans vary from one state to another and from one lender to another.

In most instances, you’ll write a personal check for the amount you intend to borrow including the fees then the lender gives you cash in return. You can then cash the check when you’re ready to pay.

There are several platforms around your area where you can get a payday loan to take care of your financial emergencies.

The Requirements

Getting approved for this loan can be very easy owing to the minimum requirements you ought to have:

  • Bank statements
  • Driver’s license
  • Proof of employment
  • Checking accounts (if you’re taking a payday loan from the bank)

The Terms

Payday loans are typically two-week loans that you can be given a few hundreds of dollars which you’re to pay on your next paycheck.

The rates are significantly high – an annual percentage rate (APR) of 400% or even more.


  • Easy approval hence suitable for financial emergencies
  • Less paperwork required
  • You may roll the loan amount over if you can’t repay when due.
  • No need for good credit score or credit history
  • You can get more than one payday loans depending on your lender and state


  • Attract relatively high rates
  • Massive penalties should you fail to repay in time
  • Some states have strict laws on the loans

Lines of Credit

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Perhaps you’ve used a credit card a couple of times before. Well, that’s how lines of credit function. You’ll be given a credit limit that you can access whenever you need to and then repay what you’ve spent over a certain period.

One difference though, unlike credit cards which can charge hefty fees should you request cash advances, lines of credit always deal in cash.

You’ll also enjoy lower APRs with lines of credit. It can be a feasible option for most individuals and entrepreneurs who want to keep some funds in the back of their pockets for a rainy day.

The Requirements

You should fulfill the following requirements for you to qualify for this short-term loan:

  • Credit score of 700+ and good credit history in case of a personal line of credit.
  • Your business should’ve been in operation for a minimum of 6 months.
  • You have a minimum of $50,000 in annual revenue.

The following documents will be essential during the application for your business line of credit: your driver’s license, bank statements, voided business check, balance sheet, business tax returns, personal tax returns, credit score, and your profit and loss statements.

The Terms

Short-term business lines of credit can range from approximately $10,000 to over $1M credit limit. The repayment term will range between 6 months to 1 year with rates ranging from about 7% to 25%.


If you choose to get a line of credit for your business, the following are the advantages that you’ll gain:

  • You can tap into the capital at any given time
  • It’s a great opportunity to build credit
  • Interest applies only to the amount spent
  • You can qualify even with lower personal credit
  • It’s suitable for a relatively wide range of business expenses


  • Collateral might be necessary
  • Lower credit scores attract high rates
  • If you intend to draw from your line of credit, you may be required to pay a draw fee
  • Involves a lot of paperwork.

Short-Term Loans

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Short-term loans can be a very straightforward loan type. Think of it as a condensed version of a traditional term loan.

This means that your business will be funded some amount that you’ll pay off with interest following an agreed schedule over a predetermined term.

Unlike traditional terms, however, short-term loans must be paid much quicker. They’re usually more affordable and available to small business owners.

The Requirements

It’s important that you have these requirements for you to be eligible for the loan:

  • A credit score of 550+
  • Have been in business for a minimum of 1 year.
  • Have at least $50,000 in annual revenue.

You’ll also need to present the following documents to your lender: bank statements, proof of ownership, driver’s license, personal tax returns, and a voided business check.

The Terms

You can be awarded a good amount, usually between $2,500 and $250,000, at the lowest APRs with this type of short-term loans.

The interest rates are usually around 10% and above with a repayment term mostly ranging between 3 to 18 months.  


  • Limited paperwork required.
  • Suitable for a relatively wide range of expenses.
  • You can set reasonable payment structure.
  • You can qualify even with a lower personal credit score.
  • The funding is significantly quick.


  • Frequent payments (daily or weekly) may be quite a challenge, especially if you’re operating a business with an irregular revenue.
  • The annual costs tend to be higher than longer-term loans.

Merchant Cash Advances

Merchant cash advances are not actually loans but cash advances that essentially serve the same purpose as short-term loans.

But how exactly do these advances work?

Basically, a lender will purchase your business’ credit card sales. You’ll then repay the cash advances through your business credit card point of purchase technology.

In fact, your lender will have intercepted a daily percentage of the revenues to your business credit card way before they reach your business’ accounts.

Therefore, every time you make a business credit transaction, the lender will deduct a certain percentage until your merchant cash advance is fully paid.

The Requirements

  • Your business must have been in operation for a minimum of 1 year.
  • You should have a minimum revenue of $50,000
  • Your personal credit score should be at least 500

You’ll also need the following documents during the application: your driver’s license, bank statements, credit card processing statements, voided business check, business tax returns, and credit score.

The Terms

You can receive merchant cash advances for your small business ranging from about $2,500 to $250,000.

The factor rates range from 1.14 to 1.18 with no predetermined repayment term since a certain amount will be paid every time you make a business credit card transaction.  


  • Relatively quick access to funds
  • Easy approval
  • Suitable for a significant range of business expenses
  • You can qualify even with a lower personal credit
  • No worries about payment amounts, it flows with business


  • Limited flexibility in terms of changing merchant service providers
  • Fees tend to be relatively higher than with traditional loans
  • The daily deductions can adversely reduce cash flow in your business.

Invoice Financing

Invoice financing aims at providing solutions to specific financial problems; cash flows constrained by outstanding invoices.

In this type, your outstanding invoice acts as a collateral. The lender will advance you a certain percentage of what your outstanding invoices are worth.

Now, what happens when your invoices are paid? Well, your lender will take the remaining percentage of your invoices, deduct and claim the interest accumulated before returning the rest to you or your business, just like that.

The Requirements

Invoice financing is the easiest loan you can get among those listed here. It’s a self-secured loan; hence requirements tend to be minimum.

To qualify for the loan, your business must have been in operation for at least 6 months and must have at least $50,000 in revenue.

The lender will require these documents from you: bank statements, credit score, driver’s license, voided business check, and of course, your outstanding invoices.

The Terms

You can get an advance of a percentage usually between 50-90% of the total outstanding invoice amount.

The number of weeks your invoice will be outstanding determines the interest your advance will accumulate at (it usually accumulates at a relatively low rate).

The term length will also depend on your invoice’s nature, probably the same amount of time you’ll be waiting for your invoice to be paid.      


  • No need to put up other assets; the invoice serves as collateral.
  • You can gain access to your invoice value as soon as possible instead of having to wait.
  • The credit of the invoiced business determines your rates and approval.


  • Longer-term tends to be more expensive as time is a crucial variable with this loan.
  • The fees can be relatively higher than traditional financing.


At this point, you can make informed decisions on the type of short-term loan to get.

While you can qualify for a typically small amount when you apply for these loans, the approval process can be relatively quick. Hence suitable for emergencies both for your personal use or business expenses.

Having the necessary documents with you will guarantee you of faster credit advice. Don’t let depression take your joy away when you can get a short-term loan.

You can also refer to other relevant blogs for more information about short-term loans. All the best!

Stock Photo from Tatomirov @ Shutterstock

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