Short-Term Commercial Loans

Although short-term commercial loans are sometimes used to finance the same type of operating costs as a working capital line of credit, they differ from lines of credit in that a commercial loan is usually taken out for a specific expenditure ( e.g., to purchase a specific piece of equipment or pay a particular debt), and a fixed amount of money is borrowed for a set time with interest paid on the lump sum.

For nearly all startup businesses, and most existing businesses, a short-term commercial loan from a bank will have to be secured by adequate collateral. Cash flow and a regular sales history are of key importance to the lender. A fixed interest rate may be available because the duration of the loan, and therefore the risk of rising rates, is limited. While some short-term loans have terms as brief as 90-120 days, the loans may extend one to three years for certain purposes. These loans may be secured by accounts receivable or inventory, as well as fixed assets.

For startups and relatively new small businesses, most bank loans will be short-term. Rarely will a conservative lender like a bank extend a commercial loan to this type of borrower for more than a one- to five-year maturity. Exceptions may exist for loans collateralized by real estate or for third-party (e.g., SBA) guaranteed loans.