What Are the Best Options for Short Term Business Loans with Low Interest?

What Is Short-Term Business Financing?

Short-term business financing refers to funding solutions that provide capital that’s repaid over a shorter repayment term. For example, repayment terms may range from three months to two years.

Typically, short-term business loans are used to cover operating expenses like payroll, maintain cash flow, or fund strategic investments. On the other hand, long-term business financing has a longer repayment period and is typically used for capital investments or major expansion projects.

Generally, short-term business financing can refer to a range of products including specific types of SBA loans, equipment financing, business lines of credit, and short-term loans.

Best Short-Term Business Financing Options by Interest Cost

The total cost of short-term business financing varies by lender, type of financing, borrower credit profile, and, of course, the interest rate. Below we break down different options by typical interest cost.

Lower-Interest Options

1. SBA Loans: Short-Term Working Capital Loans

The Small Business Administration (SBA) is a government entity supporting business owners with various resources—including financing.

For short-term business financing specifically, consider:

• Microloans: Offer up to $50,000 through SBA lending partners and generally have interest rates between 8% and 13%. Though the maximum repayment term for an SBA microloan is seven years, many come with shorter repayment terms.

• CAPlines: The 7(a) loan program through the SBA offers CAPlines, an umbrella program that supports small business owners to ensure they meet their short-term working capital needs. CAPline loans have a maximum repayment term of 10 years but can also be structured with shorter repayment terms.

Business owners looking for competitive interest rates and funds to cover operating expenses can consider these options. SBA loans have an additional benefit, as the agency partially backs the loan, which reduces risk for lenders while improving accessibility for borrowers.

For example, SBA guarantees 75% for loans that exceed $150,000 and 85% for loans $150,000 or less.

2. Equipment Financing: For Equipment Purchases 

Equipment financing can be a form of short-term business financing that may offer a lower Annual Percentage Rate (APR). The equipment purchased serves as collateral for the loan, reducing the overall lending risk, which can lead to lower interest rates.

Because the lender has an asset to retrieve if a borrower defaults on the loan, eligibility requirements may be more flexible, and there may be less emphasis on personal creditworthiness. Minimum credit score requirements might still apply based on the lender’s underwriting criteria.

Depending on the structure of the equipment loan or lease, an equipment loan or lease may have shorter repayment terms.

Moderate Interest Costs

1. Term Loans: Short-Term Working Capital Loans

Term loans offer a lump sum of capital to eligible borrowers and are generally repaid over a fixed term. Additionally, these loans often come with fixed interest rates, essentially standardizing monthly payments and making it easier for businesses to plan.

Repayment terms can vary widely, but for short-term business financing, they typically have a range from three months to two years. Ultimately, interest rates depend on many factors. Interest rates on term loans typically fall between SBA loan rates and those on a business line of credit.

2. Business Line of Credit: Flexible Financing

If you need access to revolving credit to cover short-term needs, a business line of credit could be an option to consider. Lenders approve you for a credit limit that you can draw funds from and use as necessary. Repaying the balance resets the available credit.

This can be a convenient form of short-term business financing. However, they often come with variable interest rates that can shift based on economic conditions. From an interest cost standpoint, business lines of credit are moderate to high.

What Determines Interest Rates on Short-Term Business Financing Options

When you’re looking for short-term business financing, the interest rates matter a lot. They impact the total cost of borrowing, and along with your repayment term, affect the size of your monthly payment. Here are some factors that can determine interest rates.

1. Credit Score

Lenders review credit history to evaluate your risk as a borrower. Lending involves risk, and your credit score provides a snapshot of your financial health and the likelihood that you’ll repay the loan.

To be in the best position possible, manage your debt responsibly by making all monthly payments on time.

2. Time in Business

Another common factor that lenders look at is time in business. Startups have limited operating experience and unique challenges, which can often be seen as a risk. Most lenders want a minimum of two years of operating history.

If you’ve been in business for a while and have a proven track record, that can be attractive to lenders. If you don’t have two years of experience, some online and alternative lenders may offer short-term business financing.

3. Annual Revenue

While your credit score is important, lenders also review annual revenue as part of assessing your company’s financial health. Lenders typically have minimum annual revenue thresholds that borrowers must meet to qualify for a loan.

These minimums are in place to ensure that applicants have sufficient revenue to cover operating expenses on top of potential monthly payments for a new loan.

4. Collateral

Whether you have collateral for a loan or not can impact the interest rate. Collateral is an asset that secures the loan. Lenders can legally seize the collateral if the borrower fails to meet repayment obligations to help recover costs.

A secured loan with collateral is less risky for lenders. As a result, interest rates may be lower than what you might find with an unsecured loan. Some types of financing, such as equipment loans, have built-in collateral as the item is the asset.

5. Loan Amount

If you’re in need of short-term business financing, the loan amount you request can also impact the interest rate. Lenders want to make sure they’re profiting from the amount you borrow, so the loan amount can influence the APR you qualify for.

Lenders have set administrative costs for underwriting and processing the loan. To ensure profitability, smaller loan amounts may carry higher rates. On the other hand, larger loan amounts may help you qualify for lower rates. However, it depends on many factors, including the lender and your credit profile.

6. Industry Risk

Running a small business can be a gamble for everyone. But depending on your type of industry, the level of risk could be higher, and lenders take that into account.

Lenders love predictability, stable revenue, and consistent cash flow. If businesses in your industry have major seasonal fluctuations or are particularly volatile, lenders will take that into consideration.

For example, the restaurant and construction industries can carry more risk than some other businesses, and that may be reflected in the loan terms and interest rates.

7. Existing Debt

Lenders also consider your existing debt as part of your loan application. Your debt-to-income ratio and debt service coverage ratio can impact whether your loan gets approved as well as the interest rates.

If you already have multiple debt obligations, lenders may consider this a risk and that will be reflected in the pricing.

Final Thoughts

If you need short-term business financing, you have many options to choose from. To help decide, consider funding speed, repayment flexibility, eligibility requirements, loan purpose, and business needs.

For capital on an ongoing basis, a business line of credit may be a solid choice, even if it’s not the lowest interest option. Equipment purchases can benefit from equipment financing and may have lower rates thanks to the built-in collateral.

Evaluating your financing needs, researching lenders, and comparing types of financing can help you choose what’s right for your particular situation.