Short-Term vs. Long-Term Loans | SMB Compass
Ezra Cabrera | January 14, 2019
From bridging cash flow gaps to expanding your business operations, there are many reasons why small businesses opt to secure additional funding. Without additional injection of cash to your business, it’s simply not possible to run a successful business. There are a lot of different types of business loans available in the market. They are categorized into two different groups: short-term and long term loans. Before applying for a loan, entrepreneurs must assess the needs of your business to determine whether you need a short-term or a long-term loan.
Short-Term vs. Long Term Loans
As their names imply, short-term and long-term loans primarily differ with respect to the length of time a business has to repay a loan. The terms for short-term loans can last from a few months to two years, depending on the lender. The repayment period for a long-term loan is generally extended over a longer period. Several factors to consider when determining which type of loan is best for your business. This includes the following:
- How soon you need the money
- Amount you need to borrow
- Lender
- The existing financial health of your business
- Collateral (if any) considerations you can provide, if required.
What is a Short-Term Business Loan?
Businesses often choose short-term loans to address immediate funding needs. This is usually the go-to option for many business owners when they need cash to cover emergency expenses. If you are dealing with unexpected demand/expenses, or if you want to take advantage of timely business opportunities, a short-term loan can provide you with quick and flexible financing.
You can apply for a short-term loan from alternative lenders since they tend to have less restrictive loan requirements than traditional banks. With a short-term loan, companies can secure the funding they need without borrowing a large sum of money. Aside from that, they won’t have to carry the burden of having to repay a huge loan over a long period. Short-term loans are generally used to cover day-to-day business expenses. It can include:
- Temporary cash flow issues
- Meeting seasonal demands
- Purchasing inventory
- Unexpected and emergency business costs
However, one of the drawbacks of short-term business loans is that the interest rates can be higher. So, it would help if you were sure that you could afford repayments. On the upside, it’s a great way to build your credit background. This way, you’ll get to qualify for a more comprehensive and larger loan in the future.
What is a Long-Term Business Loan?
Long-term loans, on the other hand, are often a necessity for majority of the businesses. A business looking to finance a long-term need, such as a business acquisition or expansion, is better off applying for a long-term business loan. The repayment terms for this type of loan can be as long as five, ten, or even 20 years. In contrast, short-term loans provide immediate funding (usually within a day or two), whereas approval for a long-term loan application generally takes at least a month and requires more documentation. For this reason, a lot of businesses that apply for long-term financing is usually rejected. Short-term loans, however, don’t require a lot of documents and approval is quicker than a long-term loan. Some of the uses of long-term business loan include:
- Office Renovation
- Purchasing business real estate
- Buying equipment (such as cars or large, expensive machinery)
- Expansion
This type of financing usually has low-interest rates and usually requires businesses to present collateral. By providing a guarantee, the lenders can minimize the risk they face.
Which is Better: Short-Term or Long-Term Loans?
At the end of the day, business loans do not have a one-size-fits-all solution. The type of loan you choose should depend on the needs of your business. Small business owners often choose short-term loans to add to their working capital. Long-term loans are more appropriate for someone looking to expand, acquire, and meet larger business objectives. No matter which type of loan you choose, be sure you work with a lender who understands the needs of your business. Many traditional and alternative lenders offer long-term loans, but it’s important to choose an experienced lender who has worked closely with small business owners. The experts that specialize in providing small businesses with the funding they need in order to increase their cash flow. This allows them to purchase equipment or expand their business operations. Whether that be short-term or a long term loan such as asset-based lending, invoice factoring, a business line of credit, or SBA loans – you can trust that financial experts will give you a sound advice.
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