Long-Term vs. Short-Term Business Loans

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From handling short-term cash shortages to hiring additional staff for seasonal needs, there are many reasons why a business might want to obtain additional funding. Although the amount of funding needed is likely the top consideration for business owners when looking for a lender, it’s not the only thing to keep in mind.

The type of business loan – short-term or long-term – is another important consideration, as it impacts the repayment period and often other aspects of the loan terms. Learning more about long-term and short-term business loans can help you make an informed decision on which type of funding is right for you.

What is a long-term business loan?

Long-term business loans are a type of funding option provided by traditional lenders. They’re intended to meet more long-term financing needs, such as business acquisition or future expansion over a number of years.

This type of financing often involves repayment terms that may last up to 10 or 20 years. These loan types often include additional requirements, like collateral or limits on the amount of additional funding a business can take on later.

Pros and cons of long-term business loans

These loans can be a good option for small businesses that have large, long- term funding needs. Business owners who’re willing to make a substantial down payment may be able to reduce loan costs.

However, this type of loan often has a rigorous approval process and may require collateral. This can be an issue for small businesses that are just getting started or those that don’t need a large amount of funding. Though interest rates are often lower for loans with longer repayment terms, the borrower could end up paying more in interest than their principal in some situations. Borrowers may want to consider looking for lenders who do not have prepayment penalties, which would allow them to make additional payments to the principal of their loan and potentially lessen the amount of interest that accrues over time.

What is a short-term business loan?

Short-term business loans are designed to meet more immediate funding needs, with shorter repayment periods. Short-term loans often range from six months to a year, though some may offer up to 18 months of repayment time. If a small business is dealing with unexpected demand, looking to hire employees, or hoping to take advantage of an immediate new business opportunity, a short-term loan may help provide flexible and quick business funding.

These types of loans often have less restrictive loan requirements, given their smaller funding amounts and quick repayment times. They also do not often require collateral.

Pros and cons of short-term business loans

Short-term loans may offer flexibility and quicker turnaround times than you may find with long-term loans.

The less stringent collateral and credit requirements lenders may impose to secure this financing might be why many short-term loans have higher interest rates and fees compared to their long-term counterparts. Because loan repayments typically happen within 18 months or less after a loan is taken, lenders may charge more in interest or add additional fees to maximize their profits.

Monthly payments for short-term loans are usually higher than those for long- term financing, though borrowers may end up paying more in interest with a long-term loan depending on the length of repayment time and their interest rate.

Which is better: short-term or long-term financing?

In the end, the type of funding option you choose will depend on your business needs and what you plan to use the funding for. You may consider a long-term loan if you need to borrow a large amount or are looking to fund a long-term investment, like buying a new piece of equipment or acquiring another business. But short-term loans might be the better choice if you need access to fast financing to cover expenses like payroll or cash flow gaps.

Regardless of which loan type you decide to pursue, it’s important to make sure you understand the loan terms and repayment options before you apply for financing with any lender.

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