The short answer
A short-term business loan is finance repaid over months instead of years, usually between three and 24 months, to cover a gap with a clear end date. Typical uses are paying wages and suppliers before a large invoice is paid, buying stock for a busy season, funding a contract's start-up costs or paying a tax bill. Smaller amounts are usually unsecured and assessed on bank statements, with funding sometimes within a day of approval. Larger amounts are often secured against property, through a caveat loan, second mortgage or bridging loan, which costs less and allows bigger sums. Short-term unsecured loans are commonly priced with a factor rate and repaid daily or weekly, which makes the true annual cost much higher than the headline figure suggests. For example, a 1.15 factor repaid weekly over six months works out to an effective annual rate of about 73%. Compare offers on total repayable, repayment frequency and early payout terms.
What counts as a short-term business loan?
Any business loan with a term under about two years. In practice there are two families:
| Feature | Unsecured short-term loan | Property-backed short-term loan |
|---|---|---|
| Typical amount | $10,000 to $250,000 | $50,000 to several million |
| Assessed on | Bank statements and turnover | Property equity and the exit plan |
| Speed | Often one to three days | Days for caveat loans, one to three weeks for mortgages |
| Repayments | Daily, weekly or fortnightly | Monthly, or interest capitalised until the end |
| Cost | Higher, often priced as a factor rate | Lower, priced as a monthly or annual rate plus fees |
The property-backed options are caveat loans, second mortgages and bridging finance.
How do factor rates compare with interest rates?
A factor rate is a multiplier on the amount borrowed. On $50,000 at a factor of 1.15, you repay $57,500. It sounds like 15%, but two things make the real cost higher: the term is short, and frequent repayments mean you pay back principal from the first week while still being charged the full fee.
| Loan | Repayment | Total repaid | Approximate effective annual rate |
|---|---|---|---|
| $50,000 at 1.12 over 26 weeks | $2,154 a week | $56,000 | About 56% |
| $50,000 at 1.15 over 26 weeks | $2,212 a week | $57,500 | About 73% |
| $50,000 at 1.20 over 52 weeks | $1,154 a week | $60,000 | About 45% |
Calculated by FundFox from the repayment schedules shown. Fees on top of the factor would increase these figures.
That doesn't make short-term loans wrong. Paying $7,500 to keep a $400,000 contract can be good business. It means you should compare offers on dollars repaid and check what happens if you pay early, because many factor-rate loans charge the full fee regardless.
When does a short-term loan make sense?
- A known payment is coming, such as an approved invoice, a settlement or a progress payment.
- A seasonal peak needs stock or staff before the sales arrive.
- A one-off cost, such as a repair or a tax bill, would otherwise strain working capital.
- The repayments fit comfortably within normal cash flow, including in slower weeks.
What are the risks?
Frequent repayments take cash out of the account before customers pay, which can create the next gap. Taking a second short-term loan to cover the first, known as stacking, is the most common way businesses get into trouble with this type of finance. If you need to borrow again every few months, the business may need a longer facility, a line of credit or a look at pricing and payment terms instead.
What do lenders look at?
For unsecured short-term loans: time trading, turnover, account conduct, other lenders' repayments, ATO debt and credit history. For property-backed loans: the property's value and existing debt, the exit plan and the business purpose. Either way, lenders want to see how the loan will be repaid on time.
