Comparing Business term loans: long-term Vs short-term loans
For any business, getting the right kind of loans proves to be one of the most critical decisions. Initiating a startup, expanding your space, or just managing routine cash flows, business term loans are the best option!
However, when short-term loans come into play, entrepreneurs often find themselves torn between opting for short-term or long- business term loans.
The article discusses the differences between the two, assesses some of their pros and cons, and helps you choose the more suitable option for your business goals.
What Are Business Term Loans?
As mentioned above, understanding the differences between the two is essential, but it’s also helpful to know what business term loans are. A business term loan is a lump sum of money lent by a lender that is repaid by the borrower over a set term, typically with interest. These loans are usually used for significant investments or business requirements, such as buying equipment, expansion, or managing inventory.
Term loans for business are not rigid and can be distinguished mainly into two categories: short-term and long-term. The main difference between them is the repayment duration and the purpose of the loan.
Short-Term Business Loans
These types of loans are suitable for business owners who require easy access to funds. The repayment is short-term, i.e., usually within 3-18 months. These loans are often used for emergency needs, such as managing cash flow, covering immediate expenses, or taking advantage of new opportunities.
Due to the quick repayment term, the amount lent is usually lower. However, lenders may charge higher interest rates due to the shorter loan term and unpredictable risks.
Short-term business loans can be a safe cushion when your business experiences low funds, supply chain delays, or sudden repairs that require immediate financial support.
See also: Amazon Alexa June Aipowered Businessinsider
Long-Term Business Loans
This type of loan, on the other hand, is better suited for larger investments that require more capital. These types of loans mostly come with repayment terms that range from 2 to 10 years or even longer, depending on the amount and the purpose of the loan.
One of the most significant advantages of long-term loans is that they come with lower monthly payments. This makes them an excellent choice for owners who want to invest in equipment, space, or significant business expansion without affecting their monthly cash flow.
However, it’s worth remembering that qualifying for such loans often requires a strong credit, good business financials, and sometimes security assets. But if you’re eligible, it’s one of the most sustainable financing options available.
Essential Differences with Examples: Short-Term and Long-Term Business Term Loans
While comparing, core differences will surface regarding business term loans.
Duration of Loan:
Short-term loans typically last over 18 months, while long-term loans can last up to 10 years or more.
Purpose:
A short-term loan is needed for current operational expense requirements, while a long-term loan is necessary for growth and investment.
Monthly Payments:
Short-term loans have higher monthly payments due to their shorter tenure. Long-term loans generally require lower monthly installments.
Interest Rates:
Generally, short-term loans carry the highest interest rates. However, they are such that customers will end up paying much more interest over time compared to a long-term loan, which has a lower interest rate.
Approval Criteria:
Short-term loans can usually be availed of more easily than long-term loans, which typically require a lot of documentation and good creditworthiness.
Which Type of Business Term Loan is Right for You
If your business is a startup or you need quick funds, a short-term loan may be the best option. It has easier qualification requirements and provides quick disbursal of funds; however, it is also a loan with higher monthly repayment obligations and higher interest rates.
If you are an established business with steady revenue or a good credit history, then a long-term loan would be a better fit. Long-term loans allow large funding activities to be conducted without interrupting cash flow. Long-term loans, with lower monthly repayment requirements, grant an added cushion for other business expenses.
Steps to Apply for a Business Term Loan
Whether it’s short-term or long-term, the application process is the same:
- Identify Your Needs: Determine how much you need for the business.
- Gather Financial Documents: Organize your taxes, bank statements, a business plan, and income projections.
- Check Your Business Credit Score: It will give you a positive outlook on your eligibility and the interest rate you will be offered.
- Compare Lenders: Banks, credit unions, and online lenders have different terms and qualification criteria.
- Submit the Application: Apply with all required documents and wait for approval.
With a well-laid-out business plan and a realistic repayment strategy, you can increase your approval chances and enjoy more favourable loan terms.
In conclusion
Deciding between short-term and long-term financing can be challenging. Each type has its purpose in lending, and accordingly, each has its pros and corresponding cons. For instance, short-term business loans offer speed and ease, but they require rapid repayment.
Long-term business loans, on the other hand, have lower payments that are structured over a longer term, making them better suited to sustain significant investments.
