When your business is in need of financing, there are many avenues you can explore. With Kickstarter campaigns, business credit cards, more traditional loan products, and more it can be tricky to know which avenue is best for your business.
While there are loan products out there that are tailored to meeting specific financing needs, such as equipment financing to assist in the purchase of new equipment and invoice financing to keep you afloat while you wait for invoices to be paid, long-term and short-term loans are great options to meet your more general financing needs. Each type of loan has its own stipulations and pros and cons.
By looking at the differences and similarities between these two common types of business loans, you’ll be able to make an informed decision about which works best for you and your business.
What’s a Term Loan?
Before we dive into the differences between a short- and long-term loan. Let’s talk about what a term loan is more generally.
A term loan is when a lender approves you for a lump sum of cash that you pay back, plus interest and other fees, over time. This is a traditional type of business financing and probably what you’d imagine when you think of a business loan.
The repayment term, or the amount of time you have to pay back the loan, is one of the major factors that distinguishes a short vs. long-term loan.
What Is a Short-Term Business Loan?
Short-term business loans operate much like the traditional term loan described above. You get a lump sum of cash that you pay off over time plus interest and other fees. However, the repayment term for this type of financing is characteristically short.
Typically with a short-term loan, you pay back the loan, plus interest, over 3-18 months with daily or weekly payments. This differs from long-term loans where you generally pay the loan back over a number of years with monthly payments.
Due to the shorter repayment period, short-term loans also come with higher interest rates, starting at around 10%. Short-term loan amounts are typically smaller than those of long-term loans but can be as high as $250,000. Short-term loans are commonly secured online through alternative lenders.
Why Consider a Short-Term Loan?
Short-term loans are ideal for dealing with the unexpected. Whether that’s a cash flow issue before your busy season, a surprise project that calls for additional supplies or equipment, or an uptick in demand for product, short-term loans can cover it all. Unlike some other loan products, there usually aren’t restrictions on how you can use the funds.
Because the application process typically takes place all online, approval can happen quickly, in as little as one day. The shorter repayment term also means lenders are more willing to take a risk on a borrower who has weak credit, so even if your score is less-than-stellar you may still be eligible for this type of loan.
What Is a Long-Term Business Loan?