Long-Term vs. Short-Term Business Loans

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. Though the funding amount needed is one of the most important factors to consider when looking for a lender, it is not the only thing that businesses should keep in mind as they seek funding.

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. In order to choose the right loan for your business, it is essential to learn more about long-term and short-term business loans to determine which loan type is best for you.

What is a Long-Term Business Loan?

Long-term business loans are a type of funding option provided by traditional lenders that are intended to meet more long-term financing needs such as business acquisition or future expansion taking place over a period of many years. This type of financing involves repayment terms that span many years, sometimes lasting as long as 10 or 20. These loan types often include additional requirements like collateral or limits on the amount of additional funding that a business can take on later.

What is a Short-Term Business Loan?

Short-term loans are designed to meet more immediate funding needs. If a small business is dealing with unexpected demand or wants to take advantage of an immediate new business opportunity, a short-term loan can help provide quick and flexible funding. These types of loans are offered by alternative lenders, and they often have less restrictive loan requirements than traditional banks. This loan type allows business owners to get the funding they need without taking on larger debt that is more long-term.

Pros and Cons of Long- and Short-Term Loans

Like any type of funding option, there are both pros and cons to each loan type. Understanding these factors can help you make the right decision for your business:

Long-Term Loans

  • Pros of Long-Term Business Loans

This can be a good option for established small businesses who have large, long-term funding needs. Business owners with great credit may qualify for these loans, and those who are willing to make a substantial down payment may also be able to reduce loan costs.

  • Cons of Long-Term Business Loans

This type of loan has a rigorous approval process and requires collateral. This can be an issue for small businesses that are just getting started or those who do not require a large amount of funding. Though interest rates are often lower, the borrower may end up paying more in interest as the repayment term is much longer.

Short-Term Loans

  • Pros of Short-Term Business Loans

Short-term loans offer flexibility and a quick turnaround time that you won’t find with long-term loans. Also, alternative short-term lenders can be more familiar with small business needs as they often work closely with small business owners. Alternative lenders also take more than just credit score into consideration when making a loan decision, making it easier for some small business owners to get the funding they need.

  • Cons of Short-Term Business Loans

Businesses that need a larger amount of funding may not be able to get all of the money they need from a short-term loan. Large businesses who are planning to acquire other businesses or have larger equipment or staffing needs may not benefit from a short-term loan.

Which Type of Business Loan is Best?

In the end, the type of funding option that you choose will depend on your business needs and what you plan to use the funding for. For many small business owners, a short-term business loan is often more appropriate as it allows businesses to get their funding quickly and start making it work for their business right away. However, some small business owners may find that they need long-term financing to meet their business objectives.

No matter which option you choose, it is important that you work with a lender who understands the needs of small businesses. Choosing a lender is an important decision, and you want to work with a group that aims to help small businesses succeed. There are many traditional lenders that offer long-term loans, but not all of these institutions have experience working closely with small business owners. For short-term loans, alternative lenders like Kabbage make the application and funding processes simple for small businesses who need funding quickly.

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