fbpx
Long Term or Short Term Business Loans: Which Is Right for Your Business?

Long Term or Short Term Business Loans: Which Is Right for Your Business?

When it comes to financing a business, most business owners are confused about taking long-term or short-term business loans. When it comes to business loans, most business owners are at crossroads. They just don’t know which type of loan is right for their business.

There is no denying the fact that any business needs money to survive. And there are several ways to go about financing a business. You could look for investors, form a partnership, or simply take business loans. But here’s the catch: a bad business loan could mar your business in many ways than you can even begin to imagine. 

As you’ve likely figured from the name, long-term and short-term loans primarily differ in the duration of loan payment. However, there are several other subtle pieces of information hidden behind these business loan types. And yes, every kind of financing has its place. Therefore, if you are in a dilemma concerning the exact type of business loan that’s best for your business, you’re on the right page. Let’s roll!

Why Take A Business Loan?

Before we go into what type of business loan to take, the first thing to consider is if you need a business loan. Here are three reasons why you should consider taking a business loan.

  1. Growth

Every business needs to grow! Even the largest companies in the world still seek growth. Growth is a necessity – you either grow your business, or it dies. Growth is even more important for small businesses – it is as vital as oxygen is to life. But to grow and expand your business, you need funds. You may need funds to add a new product line, expand a physical building, diversify locations, make ads, recruit new staff, etc. Taking business loans can help you to cover those expenses without adding to your operational cost. And when the expansion yields colossal profit, you can finally repay your loan.

  1. Facility and Equipment

Technology has made life easier for everyone, including business owners. Business owners can now have some equipment and facilities that considerably make work easier and faster. Mass production and mass distribution are here to stay! As your business continues to grow, the demand for your goods/services will increase. Therefore, you need the appropriate facility or resources to meet the ever-growing demand. With sufficient money, you can get the equipment and necessary facilities to help you meet this demand. So, once again, you may want to consider taking a loan! 

  1. Cash flow

Before we finally delve into what type of loan you should take, let’s check one more reason why you may want to consider taking a loan. Your cash flow! Cash flow is simply the net amount of inflow and outflow of money in a business. If your business is struggling to keep its cash flow high, you may have to cut off on many things, no matter how important they are. For example, if customers don’t pay you on time, you may have to delay your staff salaries. But how will your staff feel? Therefore, you can get another alternative source of money to keep your cash flow high. Remember, if you have a good cash flow record, your business will attract investors and motivate stakeholders.

There’s no one size fit all type of business loan. But if you think your business needs a loan, what kind of loan should you take? Every type of business loan has its benefits and drawbacks. One type of loan may be appropriate for your business today and inappropriate tomorrow. So, let’s explore each business loan type in-depth and help you choose the best loan to suit your purpose.

Long Term Business Loans

There’s no one size fit all type of business loan. But if you think your business needs a loan, what kind of loan should you take? Every type of business loan has its benefits and drawbacks. One type of loan may be appropriate for your business today and inappropriate tomorrow. So, let’s explore each business loan type in-depth and help you choose the best loan to suit your purpose.

Long-term business loans are loans that are refunded or repaid over a long period, usually more than a year after taking the loan. Long-term loans can sometimes extend to as long as 2, 5, or even 25 years of repayment. Therefore, if you seek to get a loan without urgent strains or a tight period of repayment, go for long-term loans. Let’s consider the benefits and drawbacks of long-term business loans. 

The benefits of long term business loans include:

  1. Longer repayment period: A significant advantage of taking a long-term loan is that you have a long time to settle your loan. This type of loan is best for business owners who have large expenses ahead of them, such as business expansion, purchasing the latest sophisticated equipment, etc. These types of costs may not bring immediate revenue or returns in the short term. But in the long-term, they will. Therefore, you may be shooting yourself in the leg if you take a short-term business loan for these types of projects.
  2. A larger amount of loan possible: Long-term business loans allow you to take larger amounts of money. So, if you have a massive project ahead of you, a long-term business loan will be just perfect. Therefore, this loan type is ideal for you if you plan to move to a new location, buy real estate, introduce a new product to the company, etc. What could be sweeter than a massive sum of money with an extended repayment plan?
  3. Build Credit: Long-term loans are easier to pay off as long as you’re committed to doing that. And naturally, the payment process is so structured to meet your payment capability, irrespective of unforeseen circumstances. So, if you’re looking towards building good business credit, you can take a long-term loan and make regular payments.  Good luck with building your creditworthiness!
  4. Minimize Investor Interference: If you have investors in your business, taking a long-term business loan can help you finance significant projects while keeping investors off your neck and maintaining control of the firm. 

Of course, long-term loans are not all pros without cons. Here are some of the downsides of taking long term business loans:

  1. A more stringent procedure: Hey, you’re most likely lending a considerable amount of money, so lenders can’t just give you that on a platter of gold. Long-term business loans could take strict procedures, longer approval time, and more requirements/documents to submit.
  2. Requires valuable collateral: You need to have collateral worth the loan you plan to take. And if you don’t have collateral that’s worth the loan, you might not be able to get a huge loan. 
  3. More extended payment period: Nobody wants to have to pay loans every month for years. But that’s precisely the position you’ll find yourself in if you take a long-term loan. You’ll have to keep shelling out a certain amount of money every month to pay off the loan at the expected time. And even if the interest rates may be low, you might end up paying much more than you expected in the long term.

Short Term Business Loans

Short-term business loans are loans that are refunded or repaid in a short time from the collection date. The payment of short-term loans usually falls within 12 months. This type of business loan is best for urgent financial business needs, such as a pressing debt, staff salaries, etc. Short-term business loans can rescue your business from crumbling because they cover the flaws of the operating costs in the nick of time. 

Just like long-term loans, short-term loans have their pros and cons. Let’s consider the benefits and drawbacks of short-term business loans.

The benefits of short term business loans include:

  1. Easy to get: You can complete the process of getting a short-term business loan by filling in some uncomplicated documents. After all, the amount may not be so large, and you most likely have what it takes to back it up. 
  2. Fast approval: Short-term loans have short approval times of, say, 24 to 48 hours. Have to meet an urgent need due to some unforeseen circumstances? Take a short-term business loan!
  3. Credit score boost: With a short-term loan, you can increase your credit rating and boost your credit score within a short period. This sets you in the right position to take larger loan amounts in the future. But of course, you’ll have to settle the loan in time, or else your credit score may begin to drag in the mud. 

Here are some of the downsides of taking long term business loans.

  1. Shorter repayment time: Shorter payment time could be advantageous or suffocating. While you don’t have to worry about short-term loans after a year, you may be in for some roller-coaster ride within the year! Imagine trying to pay back a loan after 4 to 8 months while you still need a longer time to make the loan worthwhile! 
  2. Borrowing capacity is low: There are limits to what you can get in a short-term loan because no collateral backs it. Therefore, if your business needs a lump sum, a short-term loan may not be an option.
  3. Higher interest rate: Short-term loans usually have high-interest rates ranging from 9% to 13% or even higher! So, coupled with the short payment period, you may have to pay higher interests!

Final Thoughts

So here we are! Have you been able to fathom which business loan will be best for your business goals? If you need some help evaluating your options, I’ll be glad to help!