Short-Term Vs Long-Term Loans: Which Is Better for Your Business?

As implied by their names, the main difference between short-term and long-term loans is how long your business has to repay them. Depending on the lender, short-term loans may last from a few months to a year, while long-term loans can last for a much longer period. When determining what type of loan is better for your business, you need to consider a variety of factors, including the amount you need to borrow, the available lenders, how soon you need the money, the collateral you can provide, and your business’s financial health.

What is a short-term business loan?

Short-term business loans help you acquire quick cash to use as working capital. The application process is swifter than with long-term loans, and in some cases, you may even be able to secure funding within 24 hours. Typically, the term will be no longer than a year. “Sometimes the loan term will be much shorter than this, but a year is often the maximum term offered,” writes NerdWallet contributor Jim Kersey. It’s usually easier to acquire a short-term loan than a long-term one, but because of the short repayment period, it is likely to have a higher interest rate. That said, because the loan period can be so short, you may still be able to pay less in interest with a short-term loan compared to a long-term loan.

What is a long-term business loan?

Long-term business loans normally last more than a year. Five-year loans are not uncommon, and they can even last up to 20 years. They also have a more thorough application process than short-term loans. “Approval for a long-term loan application generally takes at least a month and requires more documentation,” writes small business finance expert Ezra Cabrera. She adds that as part of the application process, you may also need to present collateral to help the lender minimize risk. However, the benefit of stricter requirements is access to higher-quality loans with lower interest rates and higher capital. This makes them better suited to business owners seeking to make a major investment, such as building a new office space.

What kind of loan is better for your business?

There are many factors you need to take into account before choosing a short-term or long-term loan. Short-term loans are a strong option when you need fast cash for immediate needs, whatever those may be. Cabrera says that short-term loans are “generally used to cover day-to-day business expenses” such as purchasing inventory, meeting seasonal demands, or covering temporary cash flow issues. Long-term loans are better suited for businesses seeking to expand or meet long-term objectives. Additionally, they are generally a good option if you are looking to start a new business, as the longer term will give you more time to bring in profits. “A long-term loan will usually offer a better deal to borrowers providing they meet the eligibility criteria and keep to the repayment schedule,” Kersey says.

Before you choose between a long-term or short-term business loan, make sure to thoroughly research your options. Talk with a business finance consultant to get expert advice and make the right choice for your business.