If you are looking to expand your business and require financing, a loan may be essential to help kickstart your plan. You may not have a firm grasp on the financial growth of your business as well as its objectives, but you must quickly select a loan term that best matches your business needs. Before you derive with a decision, here’s what you need to know about short vs. long-term business loans and how to decide.
Short-Term Business Loans
Based on its name, a short-term business loan has a shorter repayment period which is usually up to a over a year. The benefit of a short-term cash loan is that it offers business owners with immediate liquidity for urgent needs that can include re-paying suppliers, stockpiling essential inventory goods, and filling a seasonal cash flow. Most often than not, business loans need some form of collateral to guarantee that you can pay your vendor adequately if monetisation fails. There is no collateral needed for short-term business loans and they require lesser paperwork.
Long-Term Business Loans
A long-term business loan has a considerable repayment period and can offer a larger sum of money. These loans can be repaid for up to five to ten years or even longer. Due to these factors, they can be used to purchase cutting-edge equipment, update one’s business infrastructure, and expand one’s business to new places. Long-term cash loans need a higher monthly payment so borrowers are required to put up a collateral to secure them. It is also much more time-consuming for long-term business loans to disburse the funds as additional paperwork is required to validate the loan application.
Short vs. Long-Term Business Loans
- Amount of Loan
The main difference between these two types of loans is the amount of each loan. The larger the credit, the longer the repayment period will be for most cases. Short-term business loans involve lesser money and shorter repayment tenures whereas long-term business loans are for larger amounts and longer repayment tenures.
Since long-term business loans are for larger sums of money, a collateral is needed for borrowers to secure one. If the borrower fails to make monthly payments, the collateral may be used by the lender to recoup the financial losses. On the other hand, short-term loans do not require any collaterals so they are the more convenient and fast option.
- Interest Rates
Short-term business loans usually have higher interests which compensate for their short repayment period. In a typical scenario, short-term business loans without collaterals increase the risk of loan defaults by borrowers, hence the higher interest rates.
- Processing Time
The main reason for borrowers to choose short-term business loans is the instant disbursement they offer. Hence, the approval process for this type of loan is usually fast and straightforward. Long-term business loans, on the other hand, require a lot more paperwork such as the borrower’s business sheet to evaluate their creditworthiness. The approval process for short-term business loans take roughly 24 hours whereas long-term business loans can take much longer.