What's the difference between long-term and short-term business loans? A long-term business loan involves multi-year repayment terms following a detailed application process. Short-term loans for business provide quick access to capital, sometimes in as little as 24 hours.
Before you make your decision, it's essential to understand the differences between a short-term loan and a long-term business loan. Choosing between the two loans can affect everything from how much money you can borrow to how much interest you'll end up paying. This Union Commercial Capital blog post explains.
Short-Term Business Loans
Short-term business loans are an excellent option if you need funding quickly and do not want to be locked into a loan for many years. You might even be able to be approved and have money in your account in as little as 24 hours. Making predictable loan payments over a short time frame is also more manageable, not to mention less stressful. Short-term loans can address your immediate cash-flow problems and pay for daily expenses that do not require a long-term loan. They are an ideal choice if you need to purchase inventory for an upcoming sale or promotion, or if you need to repair or replace an important piece of business equipment, or perhaps a business vehicle.
Short-term loans also provide the right amount of money for business owners. You often need to ask for a sizable amount of money to receive a long-term loan. The lower amounts of a short-term loan make it easier to pay back the loan and get out of debt faster. Essentially, short-term loans are an easier way for business owners to get liquidity and overcome financial setbacks, as opposed to taking on larger, more long-term debt.
Long-Term Business Loans
This type of financing involves multiyear repayment terms that can sometimes last for decades. While short-term loans may have a higher interest rate at first, business owners who take long-term financing typically end up paying more interest. Long-term loans can be from 3 to 10 years in duration, and banks, credit unions, and some alternative lenders offer them. This type of loan is a good option for business owners looking to make a significant investment.
Some examples of this include office expansion, capital equipment purchases, and technology refresh programs. It is generally more difficult to be approved for long-term loans. You might qualify for a long-term loan with a low interest rate if your business has a positive credit history, strong year-over-year revenues and minimal debt, and if you have the ability to put up collateral.
Summary
A short-term or long-term loan will increase your company’s existing capital so you can take care of daily operational costs and unexpected expenses, and invest in growth initiatives. If you are not sure which loan to apply for, talk to your accountant.
Ultimately, deciding between short-term vs. long-term loans comes down to the specific needs of your business. For most small business owners, a short-term loan will likely be more suitable. However, sometimes long-term financing may be necessary.
Regardless of the length of your loan, it's important to work with a lender who understands the needs and challenges of your business. Try to find a lender who can customize a loan program to fit your needs, instead of putting your business into a one-size-fits-all box.
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