Short-Term Business Loans vs Long-Term Business Loans
Jul 13, 2021
Once you have decided on the loan you want to apply to expand your business, the hard work starts. If you don’t have a firm grasp on your business’s financial growth and wellbeing objectives, you must rapidly catch up to select a loan term that fits your requirements.
Before you can choose between short-term and long-term finance, you must respond to questions about your present and anticipated financial strength, as well as your risk tolerance.
In this article, we’ll examine the definitions of long-term vs short-term financing to help you differentiate between these two extra working capital alternatives. Then, we’ll discuss why opting for short-term vs long-term financing may have a distinct impact on your company.
Are you hunting for short- or long-term financing at a competitive business loan rate of interest? If that is the case, why not approach India’s one of the largest NBFC, FlexiLoans?
What are Short-Term Business Loans: Short-Term Cash Loans?
As the name implies, a short-term business loan has a shorter repayment period. This period is often over a year. The advantage of a short-term cash loan is that it provides immediate liquidity for urgent requirements, such as stockpiling essential inventory goods, paying back suppliers, and sustaining a seasonal cash flow. Typically, business loans need some kind of collateral to guarantee that your vendor is adequately paid if monetisation fails.
However, since short-term cash loans are for a limited period, no collateral is required to get them. Because you may apply for a short-term cash loan without committing any asset as collateral, it is convenient. Additionally, these loans need less paperwork than long-term cash loans.
What are Long-Term Business Loans: Long-Term Cash Loans?
A long-term loan provides more considerable sums and has a longer tenure than a short-term business loan. You may obtain a loan for a period of five to ten years or more with a long-term business loan. Because these loans are considerably larger and are repaid over a longer period, they are used to buy cutting-edge equipment, expand one’s company to new places, and update one’s business infrastructure.
In summary, long-term cash loans need a higher monthly payment. As a result, you may be asked to put up collateral to secure these loans. Loan disbursement is also a somewhat more time-consuming procedure for long-term business loans than short-term business loans. It is because lenders often need extra paperwork to validate your loan application, such as a soft copy of your company’s balance sheet.
Difference between Short-Term Business Loans and Long-Term Business Loans
It’s easier to comprehend the distinctions between long-term and short-term finance when seen through the perspective of a business lender.
The amount of Loan: The primary distinction between long-term vs short-term financing is the amount borrowed. Naturally, the larger the credit amount, the longer it takes to repay in most instances. Short-term business loans have a smaller loan amount, which makes repayments simpler and without incurring debt.
Collaterals: A long-term business loan is for a larger sum and has a longer duration, resulting in payments occurring over a longer period. As a result, lenders often need collateral, or security, for these kinds of loans. If a borrower fails, the lender may recoup their losses via the sale of such security or collateral. Short-term loans, on the other hand, are often unsecured and do not need collateral. They may, however, need some kind of indirect collateral in some circumstances.
Interest Rates: Short-term business loans often have a high-interest rate to adjust for their short payback duration. Typically, short-term business loans without collateral, which increases the risk for lenders in the event of loan default, which is compensated for by charging high-interest rates.
Time of processing: The primary reason borrowers choose short-term business loans, such as a personal loan, is for the instant liquidity they provide. As a result, the lenders’ approval procedure for these loans is fast and straightforward. Short-term loans need little paperwork. Long-term business loans are granted after all qualifying requirements have been fulfilled, and the borrowers’ creditworthiness has been carefully evaluated. The market value of these assets is determined in the case of secured long-term business loans. Short-term loans are often granted within 24 hours, which is almost difficult with long-term loans.
- Duration: Short-term cash loans typically have a payback period of between one and three years. Whereas long-term cash loans often have a duration of five to ten years. The extended repayment term enables businesses to spread their mortgage payments over a longer period.
Key Differences at a Glance
|Properties||Long-Term Cash Loans||Short-Term Cash Loans|
|Duration||The tenure of long-term business loans ranges between five and ten years, or possibly longer in certain circumstances.||The tenure of short-term business loans ranges between one and three years.|
|Interest %||In the case of long-term business loans, the interest rate is levied at a lower rate.||In the case of short-term cash loans, interest is levied at a greater rate.|
|Eligibility||Stricter conditions for eligibility.||Slightly more flexible eligibility requirements.|
|Documents Required||Paperwork is complicated.||Paperwork is minimal.|
|Time of Processing||They often need a lengthy application procedure that may take up to a week or two.||They often offer faster access to money, up to 24 hours in certain cases.|
|Time for disbursement||Disbursement is determined by the lender and may take up to a week or two||Rapid disbursement, usually within a few days|
Which Business Loan is Best for You?: Short Term Vs Long Term Financing
To determine if you’ll profit more from a short-term or long-term business loan, create a strategy for how you intend to utilize the loan funds. A specific and short-term objective will need a short-term cash loan. A more ambitious and long-term goal will require the assistance of long-term financing. Additionally, you should consider collateral if you can readily pledge an asset as security for your loan.
How to Decide between Short-Term Business Loans & Long-Term Business Loans?
1. Cash flow requirements
When choosing the payback duration of your small-term business loan, timing is crucial. At a minimum, you need funds to pay the loan amount if it is due. However, a bad due date may still create severe financial pressure on your business.
Consider the following scenario: your payment is due, and you make it on time, but you now have very little cash remaining. Almost certainly, you’ll find yourself struggling to pay other expenses or compelled to postpone other investments. By paying other payments late, you risk incurring late penalties or earning a low credit score, further compromising your business’s financial position.
To prevent this, make accurate forecasts of your business’s cash flow requirements. While you’re about it, keep in mind what other expenditures you may have that may impact your cash flow as your loan repayment date approaches.
2. Consider your financial situation now and in the future
If you’re considering multiple possibilities, a short-term loan may make sense to allow you to do the necessary research to determine which one is worth pursuing. However, if you are just starting and your short-term cash flow is unclear, you should allow yourself more time.
A long-term business loan would make more sense in this situation. If your business fails, it’s not ideal to have a long-term business debt hanging over your head. As a result, a short-term business loan may be a preferable starting point.
3. Assess your risk tolerance
Each entrepreneur must assume the risk of success, but every entrepreneur’s risk depends on several variables. It’s important to remember that there is no “right” answer to the question of how much chance you can take. Additionally, while choosing between short-term and long-term finance, the risks associated with each are context-dependent.
True, when all other variables are equal, a long-term business loan is riskier than a short-term business loan since it takes more time to repay. In reality, however, all other variables are seldom equal.
Generally, you’ll have to make higher installments on a short-term business loan than you would on a long-term business loan since the debt must be repaid quicker. From this vantage point, you might argue that a short-term business loan is riskier for you if the increased payments are likely to result in financial difficulty.
Finally, you should ascertain which loan choice is most likely to be approved. Often, newer businesses will be unable to get long-term funding simply because they lack financial history. In such a scenario, short-term financing may be your only choice.
Business loans are often the catalyst for a business’s development. With the assistance of a loan, you may outfit your company with office space, necessary supplies, and equipment, among other things. Any company, at some time, may significantly benefit from a business loan. This is where commercial loans come into play. An MSME business loan may assist you in not only sustaining but also growing your company via the acquisition of new merchandise, updated equipment, and more cash flow for future projects and operations.
FlexiLoans makes the process of availing short-term or long-term business loans a hassle-free affair. FlexiLoans is an NBFC founded to address the challenge that SMEs have in obtaining Quick, Flexible, and Adequate funding for business growth.