Short-term business loans: how they work, what they cost and who can get one

A short-term business loan is a lump sum you borrow from a lender and repay over a short, agreed period. This repayment term will typically be a year or less, but definitions of ‘short term’ and the associated repayment terms do vary by lender. For example, if you apply for a Funding Circle Short-Term Business Loan, the terms are either 6 or 12 months.

To understand where this type of loan might be appropriate, let’s explain in more detail what a short-term business loan is, how it works and how you can apply for one.

What’s a short-term business loan

A short-term business loan provides your business with upfront capital when it’s urgently needed. The loan will be repaid quickly, usually in 12 months or less, and will be used for immediate operational needs. In practice, this will typically mean that the funds are used to cover payroll gaps, purchase seasonal inventory or manage unexpected, ad-hoc expenses.

A short-term loan differs from a long-term loan by offering smaller funding amounts and faster approval times. However, on the flip side, the short-term loan will usually mean higher interest rates and more frequent repayments to the lender.

Typically, you’ll begin paying interest on the loan when the funds are first paid out, although you should check the specific terms of a loan with your lender.

How a short-term business loan works

If a short-term business loan sounds like it could solve your cash flow or liquidity problems, the next step is to find a lender and apply for the loan. 

Let’s look at the key steps in this loan application process:

1. Check your eligibility with the lender: Review the lender’s requirements regarding turnover, credit score and trading history and make sure your business ticks the right boxes. Gathering the key financial information, data and documents early will speed up the application and review process. 

2. Check whether there will be a soft or hard credit check: It’s good practice to check if applying for the loan will generate a soft or hard credit check. It’s also sensible to know the impact of these checks on your credit profile. 

3. Apply for a short-term business loan: Complete the online application form and submit any supporting documents required by the lender. This will generally include your recent company bank statements, filed accounts and proof of company identification. Some lenders may ask for access to your accounting system to access your financial data in real time.

4. Receive a decision and offer from the lender: Review the loan offer carefully before you sign anything. This means checking areas like the total borrowing costs, annual percentage rate (APR), repayment schedule and any arrangement fees before you sign on the dotted line.

5. Receive the funds into your company bank account: Once approved and signed, the agreed funds are transferred directly into your business bank account. Interest will typically begin to accrue from this first draw-down date. Note, payout times vary by lender. 

6. Repay the loan in line with the agreed terms: Once the funds have been received, you’ll need to start repaying the loan. This will typically mean making scheduled daily, weekly or monthly repayments via automatic direct debit. The specific details of these repayment terms will be set out in the original loan offer. It’s vital to make the repayments on time and in full, helping to maintain a healthy business credit profile and avoid late fees.

How quickly can you access a short-term business loan?

If you’re in the market for a short-term business loan, the chances are there’s an urgent need for these additional funds. As such, speed can be of the essence.

The turnaround from loan application to decision can be fast, but timings will vary from lender to lender. For example, if you apply for a Funding Circle Short-Term Business Loan of £250,000 or less, we’ll tell you instantly whether your application has been accepted. 

What can you use your business loan for?

As with most business loans, the conditions of the loan agreement will generally stipulate that the funds must be used exclusively for business purposes.

A short-term business loan could be used to:

• Bridge the gap between customer payments and supplier expenses: The funds can be used to cover immediate payroll costs, supplier invoices and operational bills when customer payments are delayed. This helps keep your cash flow on track and protects your business credit rating while you wait for any late payments.

• Buy in seasonal stock: Extra cash allows you to buy inventory or raw materials at discounted prices before busy sales periods. This is a great way to maximise your seasonal revenue without exhausting your day-to-day working capital reserves.

• Cover unexpected, ad-hoc costs: The loan can provide emergency funding to urgently repair critical equipment, fix essential premises or settle unexpected tax obligations. Having more cash in the bank helps meet these ad-hoc costs and keeps your operations running, without any serious business interruptions.

• Grab time-limited business opportunities: With more working capital, you can quickly capitalise on any sudden commercial opportunities. For example, you might want to buy up discounted assets from a business sale, agree on bulk trade terms with a customer or expand the business to meet your growth objectives.

What does a short-term business loan cost?

Before you enter into a loan agreement, it’s important to understand how the final cost of the loan will impact your company finances. 

Here we’ll break down the key costs involved in taking out a loan:

• The original loan amount: This is the principal sum you’ve borrowed from your chosen lender. This amount forms the baseline for calculating your total interest costs and determines the initial capital that’s injected into your business.

• Interest on the loan amount: Interest is one of the key additional costs of borrowing. The interest on your loan is charged as a fixed or variable percentage rate and will typically accrue daily or monthly. This interest amount is then added onto your balance, increasing the amount you will finally repay.

• Fees from your lender: Lenders will often add additional operational charges to the cost of the loan. These could be fees for arranging the loan, admin costs or even early-settlement fees. These fees will increase the overall effective cost of your short-term loan, so be sure to factor them into your cash flow.

• Total repayable amount and regular repayment amounts: This is the combined sum of your principal loan amount, total interest and fees, divided into fixed daily, weekly, or monthly instalments until fully paid off.

The impact of interest rates and fees on your total repayments

When you take out a business loan, it’s vital to factor in the additional costs of paying the interest and additional fees on this loan.

The interest rates and fees you pay will vary from lender to lender, so it’s worth shopping around to get the very best deals. For example, Funding Circle Short-Term Business Loans have no upfront fee when you apply directly, no additional fee to overpay and no additional early-settlement fee.

The interest rate you pay will typically be defined by your creditworthiness as a business. Low-risk borrowers with good business credit scores will often pay lower rates. 

Loans are available with both fixed-rate and variable rate interest. Fixed-rate loans don’t change the interest rate over an agreed period. With variable rate interest, the interest rate can change. 

When taking out a variable rate loan, bear in mind that changes in inflation and the Bank of England interest rate can also push the costs up. 

Who can get a short-term business loan?

Lenders want to know that borrowers have the financial capacity and stability to take on a loan.

Factors that will generally impact on your perceived risk level as a business will include the length of your trading history, the overall financial health of your accounts and your forecasted revenue and cash-flow positions – key factors in being able to repay the loan.

An established limited company with stable financial foundations will typically find it easier to get a loan approved than a new sole trader with no trading or payment history.

What are the Funding Circle eligibility criteria? 

To apply for a Funding Circle Short-Term Business Loan, you must:

• Be a UK-based limited company or LLP

• Have a trading history of 12 months or more

• Complete our affordability assessment.

You can check whether you’re eligible in just 30 seconds. 

Will there be a credit check?

If you’re a limited company, we’ll carry out a soft credit check when you apply for a loan. This does not have an adverse impact on your business or personal credit score.

You may be asked to give a personal guarantee as a director of the company. This protects the loan if the company can’t meet the repayments or defaults on the loan.

Should you choose a short-term loan or another option?

A short-term business loan isn’t the only route to fast, available capital. There are other options to consider that might be a better fit for you and your business.

Let’s explore some other ways you could fund your business:

• Line of credit: An ongoing line of credit, like Funding Circle’s Flexipay, allows you to take on credit, extend your bank balance and make card payments to cover the costs of operational expenses. You can then repay the balance in agreed instalments.

• Business credit cards: A credit card, like Funding Circle’s Cashback card, gives you and your team a company credit card to use for ad-hoc costs and other expenses. You repay the balance each month and can even earn cashback on your transactions. 

• Invoice finance: Invoice factoring and discounting allow you to sell your unpaid customer invoices on to a finance provider, who will then pay you the value of the invoice. This is a fast way to boost cash flow using the capital the business has tied up in unpaid invoices. 

Things to think about before borrowing

Applying for a business loan can be the ideal way to fill your cash-flow gaps and expand your working capital in the short term. But it’s good practice to look at the long-term implications of entering into a loan agreement.

For example, consider that:

• Repayments: Repayments for a short-term loan are larger per month than a longer-term loan, as you’ll have to repay the whole loan sum in less than 12 months. Bear this in mind when considering the right finance options and your current cash flow.

• Sticking to a budget: Only borrow what you need for the most pressing business needs. This isn’t ‘free money’, so it’s sensible to keep debt levels as low as possible. 

• The risk of a personal guarantee: If you have to offer a personal guarantee and the business defaults, you could be putting your own personal assets at potential risk (assets like your property, vehicles and other high-value assets).

The finance option that’s best for your business will vary depending on your specific circumstances. It’s always sensible to talk to your accountant, legal representative and financial adviser before deciding on any kind of debt finance or credit arrangement.  

How Funding Circle can help you access funding fast

At Funding Circle, we know the value of fast, straightforward access to short-term finance.

You can apply for our Short-Term Business Loans in a matter of minutes, and quickly get an answer on how much you can borrow, at what rate and on which terms.

• Borrow from £10,000 to £750,000

• Repay over either 6-month or 12-month terms

• Zero fee to take out the loan when you apply directly

• Only pay interest for the time you borrow

• Overpay or settle early for no additional fees

• Get a decision instantly (up to £250,000)

Always be aware of the implications of giving a personal guarantee and be sure to consult with your financial and legal advisers before signing up for any loan agreement.

Apply for a Short-Term Business Loan

Short-term loan FAQs

How long can a short-term business loan be?

Short-term loans are paid back in instalments, typically over a period of a year or less. For example, Funding Circle offers repayments terms of either 6 months or 12 months.

Can I repay a short-term business loan early?

You can repay a short-term business loan early, but some lenders will charge you an early-repayment fee. Funding Circle does not charge an early-repayment fee. 

Does applying for a short-term business loan affect my credit score?

If you apply for a loan, lenders will typically carry out a soft credit check in the first instance. This does not affect your credit score. If the lender carries out a hard credit check, this will affect your credit score. Some lenders may also ask company directors for personal guarantees, which could impact your personal credit score. 

What can I use a short-term business loan for?

Short-term business loans must be used exclusively for business purposes. For example, you may use the loan to cover unexpected operational expenses, payroll costs or to shore up cash flow.

Who can apply for a short-term loan with Funding Circle?

To apply for a Funding Circle Short-Term Business Loan, you must be a UK-based limited company or LLP, have a trading history of 12 months or more and meet our affordability check. Use our Eligibility Checker to see if your business qualifies. 

Disclaimer

21/10/26: While we want to help as much as we can, the information found here is provided solely for informational purposes and should not be considered financial or legal advice. To the extent permitted by law, Funding Circle does not accept any liability for any loss or damage which may arise directly or indirectly from the use of, or reliance on, the information contained here. If you have any questions, please speak to your professional adviser or seek independent legal advice.