The two biggest drivers that would determine whether you should choose a short-term or long-term loan is your financial ability, and how you plan to use the money. The main disparity between short-term and long-term business loans is the length of time of repayment.
There are plenty of reasons why you might choose one over the other, or in some cases, both. Your time in business, credit utilisation, financial history and liquidity play a significant role in the type of loan you can acquire as a business owner.
Here’s what you need to know about the differences between short-term business loans and long-term business loans.
Pros of long term business loans
Fundamentally, long-term business loans can be repaid over a couple of years, going as long as a decade or even more. Long-term loans are designed to meet long-term business needs, which include expansions and asset acquisitions that require enormous liquidity. In addition, these loans can accommodate ventures that have recently been established but are looking forward to growth shortly.
If you need a business loan that is upwards of hundreds of dollars, then a long-term business loan is ideal. Companies with established operations tend to prefer long-term business loans over short-term ones as they tend to have significant business plans that are set to bear fruit within the near future.
Cons of long-term business loans
From collaterals to limitations to additional funding on top of the loan amount, long-term loans are often associated with restrictions that can partially cripple some operations if they are not careful.
If your business has a poor credit history, the loan application may come with a rigorous credit check and approval process.
Pros of short-term business loans
Acquiring a short-term business loan, like the ones issued by reliable licensed moneylenders, is pretty straightforward as it comes with a less rigorous approval process and offers more flexibility. If you have a critical and urgent financial need, then a short-term business loan can be the ideal option.
Additionally, the short-term nature of these loans means that you have less time to repay. While this limited repayment period might seem like a setback, you will incur fewer interest charges as there will be no time for interest to accumulate.
Cons of a short-term business loan
Besides the apparent fact that short-term business loans tend to have limited amounts of money, their associated interest rates are significantly high. Depending on the initial payment terms, short-term business loans can be incredibly expensive to repay.
Even though you might have cleared your loan balance within a short time, the hundreds of dollars that could pile up due to high interest rates may cost you even more.
Long-term financing is more appealing to business owners with the need for more capital and added flexibility in repayment. Short-term business loans, on the other hand, are more straightforward to acquire, but they come with higher interest rates.
You should keep in mind that business needs vary differently between companies. As such, choosing the best loan with regards to the associated repayment terms and flexibility is essential.