When you need fast funding, it’s likely time to consider short-term business loans in Canada. Short-term business loans, sometimes seen as payday loan alternatives, can be hugely beneficial when you need money, but they can have their drawbacks.
In today’s blog, the team at Bizfund shares more on the pros and cons of the different types of short-term business loans. We also share more on each type and help you decide which best suits your business financing needs.
Types of Short-Term Business Loans in Canada
There are quite a few short-term business loans in Canada that you can explore, but to help narrow down the list, you’ll find a few of the best options below for your business. Some of the below are even low-interest options.
Short-Term Working Capital or Term Loans
The most common types of short-term business loans in Canada are short-term working capital or term loans. With this type of short-duration loan, you’ll have access to a lump sum, and you’ll usually have under 12 months to repay it.
To get approval for a short-term working capital loan or term loan, you’ll need to show lenders recent sales data, bank statements, a good credit history, and cash flow if you don’t have collateral. In addition, you need to know that, since the repayment term is compressed, the installments your business will pay are likely to be higher.
Short-Term Business Lines of Credit (Revolving Credit)
Lines of credit are often a good choice because they give you access to a pool of funds that your business can draw from when it is needed. You also have the flexibility to repay when cash flow returns.
If this sounds like a short-term loan option you’re interested in, you’ll be happy to learn that most Canadian lenders, including banks and alternative lenders, offer short-term business lines of credit. These institutions often provide revolving credit with flexible repayment and draw mechanics, making it ideal for supplier payments, cash flow gaps, and routine expenses.
In addition to this type of short-term business loan in Canada, you’ll only pay interest on what you use, not on the full limit. For many businesses (including yours), this can help keep costs low when used wisely.
Merchant Cash Advance (MCA)
A merchant cash advance is often a good choice for those looking into short-term business loans in Canada. With a merchant cash advance, you have access to funds quickly, usually within 24 to 48 hours, when taking out financing with a company like Bizfund.
You can also take out between $10,000 and $300,000, based on your business’s expected credit or debit card sales. In addition, instead of you needing to pay monthly repayments, you can repay what you use by giving a lender a percentage of your daily or weekly card revenues.
Since approvals depend more on a business’s sales volume than credit scores, it might suit your needs, especially if you run an asset-light business or a newer company. However, you will need to demonstrate consistent card transactions to increase your chances of approval. You’ll also need to factor in that these can be more expensive than traditional short-term loans, but they do offer more flexible use of financing.
Short-Term Online Term Loans
When businesses need access to quick funds for restocking inventory, bridging seasonality, or covering unexpected costs without committing to long-term debt, short-term online term loans could be worth considering.
With the rise of alternative and fintech lenders, many Canadian businesses, including yours, can access short-term online term loans with repayment terms of 6 to 12 months. These loans often don’t need your company to provide heavy collateral but instead rely on recent cash flow. It’s also worth knowing that these loans are usually unsecured or lightly secured. And they have the added convenience of often having a wholly online application process.
Risks and Benefits of Short-Term Business Loans in Canada
Now that you know more about your business’s options for short-term business loans in Canada, you should look into the risks and benefits of these loans. Below, we share a few must-know pros and cons about short-term business loans that you need to try to keep in mind:
The Risks
- Higher costs: Certain short-term loans come with high fees, interest rates, and penalties if you ever default on repayments. You should expect this most of the time when a short-term loan doesn’t require a credit check. This is because a lender reduces the risk they face by charging your company more to borrow funds.
- Repayment timelines can be aggressive: Short-term loans are meant to be repaid quickly, and for many Canadian businesses, this can feel aggressive. If you take out a short-term loan, you might run into the issue where you don’t have much room to spread out costs, and this could leave you in a vulnerable position.
- Limits on how much you can borrow: With short-term loans, you won’t be able to borrow as much as you could with a longer-term loan, with the exception being a merchant cash advance. This makes short-term loans a bad fit for larger financial needs.
The Benefits
- Applications are easier: Although some lenders will need you to provide a detailed application in line with traditional loans, most don’t. The majority of lenders offering short-term loans offer simple and easy applications, and with most, you can complete them online. You’ll also often only need to share a relatively small amount of business information.
- Access is easier: With traditional loans, it’s often very hard to secure funding. This is especially true for entrepreneurs, self-employed individuals, startups, and small businesses. Fortunately, short-term loans are accessible to these groups with less restrictive qualifying criteria.
- Low-credit-score-friendly: Longer-term loans often require businesses to prove excellent creditworthiness. Unfortunately, this isn’t always possible, which is when short-term loans are more beneficial. These loans don’t all rely heavily on creditworthiness. For example, Bizfunds merchant cash advance isn’t solely reliant on credit scores for approval.
Safer Alternatives to Short-Term Business Loans
Understandably, you might not want to take on high-risk loans even if it is only for the short term. Fortunately, there are safer alternatives to short-term business loans in Canada.
For example, you could choose to go the government-backed loans route. In Canada, there are many programs, such as the Canada Small Business Financing Program, that make it much easier for your small business to get a loan. With this loan in particular, you’ll work with a financial institution, but the government will share the risk with lenders. In these situations, you’ll likely have much lower interest rates and longer repayment terms, which can often be handy.
If you don’t want to commit to a loan wholly, you could also choose a business credit card instead. A business credit card might not give you access to a large sum, but it can cover day-to-day expenses or temporary cash flow gaps. It’s also pretty neat that many Canadian business credit cards offer interest-free grace periods if you pay your balance in full monthly.
In addition, if you only need funding for inventory or equipment, you could consider financing for either. These financing options are for when your business needs inventory, machinery, or vehicles. In this type of financing, the assets you acquire serve as collateral. Since this reduces a lender’s risk, it often means you enjoy a lower interest rate and easier approval.
However, if you don’t want to go the loan route whatsoever, you could try your business’s luck with a Canadian provincial or federal small business grant. With a grant, you won’t need to repay anything, but there are usually strict rules surrounding how you can use it. Also, grants are competitive, so there aren’t any guarantees you’ll secure funding in the short term for your needs.
Key Takeaways: How to Choose the Right Loan for Your Business
With so many short-term business loans in Canada on offer, it’s crucial to make the right choice. This means you need to know why you need the funds, how long you’ll need them, and how quickly you can repay them. When you know the answers to these questions, you’ll have a better understanding of which short-term loan solution is best for your business.
We hope that what we shared in today’s blog gave you a better understanding of a few of the loan types you can explore, the pros and cons of short-term financing, and safer alternatives you might want to try. If one of the alternatives you’ve set your sights on is a merchant cash advance, you’ll likely find what you need to know here at Bizfund. We offer MCAs for businesses to help give you access to fast funding when you need it.
