When deciding between long term business loans and short-term alternatives, there are several key factors to consider. The loan amount and interest rate are usually the first two that spring to mind, as these have a big influence over repayment amounts. But it’s also important to consider other aspects of business loans, such as credit scores, lender experience, and any potential impacts on your personal credit. In this article we’ll walk you through the pros and cons of both short term and long term business loans, so you can make an informed decision about which may be suitable for you.
What Are Long Term Business Loans?
Long term business loans are typically repaid over several years, sometimes as many as 10 or 20. As the name suggests, they are designed to meet the longer term financial needs of a business. This might involve activities such as expansion or acquisition which can require larger amounts of financing. It may also involve ventures that aren’t expected to be immediately profitable but have an upside that’s predicted for a fixed point in the future.
What Are Short Term Business Loans?
Short term business loans are designed to meet the more immediate needs of a business. They are usually repaid in a matter of months rather than over several years. Businesses tend to use a short term loan in situations where they expect to see a return in the near future. This might be taking on extra staff to keep up with additional demand or replacing a delivery vehicle that has reliability issues. Because the financial benefit of these types of investment will be immediately felt, the loan can be paid off much faster than a longer-term venture allows.
The Pros and Cons of each
Each type of business loan has its benefits and drawbacks. By understanding both options in more detail, you’ll be better equipped to make a sound decision for your business needs. Let’s look at both aspects of these loan types…
Long term business loans tend to be available for larger amounts of money. If you need to finance a business activity costing several thousand dollars, then it’s more likely that a long term loan will be approved for the whole amount.
They often involve lower interest rates and smaller monthly repayment amounts too. Because you’re paying it off over several years rather than months, the repayments are divided over a longer time. This can be beneficial for cash flow purposes and make long term business loans more affordable.
Business owners with established operations tend to be viewed more favorably by long term lenders. So, if you’re a small business with several years of good accounts, then your terms are likely to be better. Making a significant down payment can also stand you in good stead and reduce the overall cost of the loan.
Because long term business loans are usually for larger amounts of money, they tend to have additional requirements that need to be met. These can be collateral or limitations on the amount of additional funding that’s available on top of the loan amount. They may also involve a more detailed approval process which excludes businesses or owners with a poor credit history.
Short term loans tend to be quicker to acquire and offer more flexibility. Since the approval process is less rigorous, they can be much faster to process. If you have an opportunity that needs to be taken advantage of quickly, then short term loans may be the best option.
Their short-term nature also means they’re paid off more quickly. This can be beneficial in terms of the overall amount you repay since there’s less time for interest to accumulate. Of course, this will depend on the interest rate, so it’s important to calculate the overall loan amount. Which brings us neatly onto the next point…
The biggest drawback of short term loans is that they tend to have higher interest rates associated with them. This may or may not make them more expensive to pay back, depending on the loan term and any initial repayments you make.
Depending on the amount you need, a short term loan may not be large enough to cover it. Short term lending options tend to be limited to smaller amounts than long term business loans. So, if you need several thousand dollars or more, a long term loan may be your only viable option.
Which Loan Type is Best for Your Business?
The best type of business loan will address the needs of your specific business situation. It will vary for everyone based on many of the factors we’ve already discussed above. If you’re looking for a line of credit to invest in a long-term opportunity, then a loan over a longer period may be more suitable. Likewise, if you need a larger amount of money then long term business loans are likely to be your only choice. An established business with good credit history should be able to secure the required amount with competitive terms.
If you only need a loan for a limited period of time, then a short-term loan may be a more practical option. It can free up working capital to tide you over during a quiet season or help you take advantage of a business opportunity quickly. Short term loans often involve less paperwork, so you’ll have a better chance of securing one, even if you have a limited trading history.
The key to this decision is to evaluate all of the terms, including the total repayment amount. Although long term business loans tend to have lower interest rates, the borrower may end up paying more interest because the monthly payments are split over several years instead of months. Use a loan calculator to assess the different loan options and total repayment amounts for each. You can also take advantage of your lender’s expertise and specialist knowledge. At Strategic Capital our team can offer you unbiased advice that’s tailored to your unique business situation. Check out our small business loan solutions today!