While most Americans have strong enough credit to apply for the majority of loans, you can easily slip under qualification levels if you miss a few payments or take out too much debt at once. Unfortunately, it can take a long time for your credit to improve after it dips. The good news: you still have funding options even if your credit is bad—some lenders will even approve short term loans from applicants with credit scores as low as 500.
Short term loans have relatively easy-to-complete applications and are known for their incredibly short application approval time: sometimes decisions are sent down by lenders within 24 hours after an application is submitted. Additionally, the repayment terms are much shorter than you might expect for a term loan, compared to a traditional lender like a bank. Repaying can take 30 years or more; short term loans are often repaid within a few months to 2 years.
“A short term loan is the sprinter of the loan world—you can get funds in as little as a day,” according to Lendio’s definition.
This speed is why short term loans are popular with small business owners, even for those with poor credit. A rapid cash infusion can help you to take on a sudden expansion opportunity or dig yourself out of an unexpected cash crunch.
“Built specifically for speed, you can use [short term loans] to meet sudden financing demands like new business opportunities or managing cash flow,” Lendio continues. “And if you need unexpected cash for your small business, a short term loan can be a convenient antidote.”
Used responsibly, a short term loan can help your company to stay on pace, even if your credit is suboptimal. In some cases, paying back a short term loan on time can help you to build up creditworthiness.
Lenders will approve short term loans to people with lower credit scores because these lenders evaluate different factors than term loan lenders like banks. With term loans, you and your business are judged on your creditworthiness, financials, and overall business health. With short term loans, lenders look chiefly at your ability to repay the loan—in this framing, your credit score and credit history are less important.
“Because the loan amounts are limited for short term loans, the lending requirements are usually more relaxed, making it easier to get approved,” advises Sean Peek, writing for the US Chamber of Commerce. “The approval and funding timelines are faster as well.”
When applying for a short term loan, you should expect to show proof of income and the annual revenues of your business. You’ll also be required to show how long your business has existed, in most cases.
But once you gather all this information, the application process is pretty straightforward. You won’t need to go too in-depth into the fundamentals of your business because a short term loan isn’t interested in investing in your company like a bank would be.
Of course, the trade-off for the speedy approval of short term loans is high interest rates. They generally have a higher interest rate than term loans, but some interest rates are as low as 8%. You’ll want to pay special attention to the interest rate of any loan you receive.
You can be approved for short term loans from some lenders with a personal credit score as low as 500, and a few will offer loans to those with scores of at least 600. A score of 350 to 579 is considered “poor,” while a score ranging from 580 to 669 is considered “fair.” As your credit score climbs to 650 or above, you will be able to qualify for a large number of short term loans.
On the other hand, term loan lenders generally want applicants with a minimum credit score of 700, and some prefer applicants to have credit scores in the “exceptional” range of 800 to 850, the upper limit of credit scores.
Typically, the lower the minimum credit score for approval, the higher the interest rates. You’re considered more of a risk when your credit score is poor, which is why these loans cost more. To get better rates, try to improve your credit by paying down debt. In some cases, responsibly paying off loans on time can help to nudge your credit score upward.
In the past few decades, an entire industry of business lending products has developed because term loans are out of reach for so many. Beyond short term loans, business credit cards and business line of credit remain popular, especially for small business owners with lower credit scores. Many of these products have higher interest rates, but you can often find deals with some searching.
Other loan alternatives include options like invoice factoring, equipment financing, or merchant cash advances. Each of these options reviews a certain aspect of your business—unpaid invoices, business equipment, and daily credit card sales, respectively—in making their approval decisions. Therefore, credit scores are either less important or not requested by these lenders.
Even if you’re in crisis, you still must plan and research your short term loan options carefully, especially to avoid overwhelming loan repayments. When this happens, some small business owners apply for even more short term loans to cover earlier loan repayments, creating a dangerous circle of debt. Even if you avoid this, you risk falling into dreaded cash crunches, where your cash flow isn’t enough to cover upcoming expenses.
If you begin the application process knowing what you need and are willing to pay, short term loans are a reasonable way to obtain a fast boost in capital. Platforms like Lendio are great for connecting you with all the necessary information and helping you to find the best deal for your business.