Short Term vs. Long Term Loans Comparison for Business Owners
For small business owners, taking out a loan is often necessary to keep a business afloat. However, knowing which type of loan is right for your business can be difficult. Should you take out a short-term loan or a long-term loan? When choosing between the two, it is important to consider both the pros and cons to make the best decision for your business.
What Is a Short-Term Business Loan?
A short-term business loan is a loan that has a repayment period of one year or less. These loans are typically used to cover expenses that are not expected to last as the business grows. Some common examples of short-term business expenses include:
- Inventory
- Advertising and marketing campaigns
- Seasonal staff
- Working capital
Pros and Cons of Short-Term Loans
Short-term loans offer several advantages. One of the biggest benefits is that they can be easier to qualify for than long-term loans. Another advantage of short-term loans is that they can provide much-needed capital quickly. A short-term loan can be a great option if your business needs cash fast.
However, there are some drawbacks to taking out a short-term loan. One of the biggest disadvantages is that they often come with higher interest rates than long-term loans. This is because lenders view short-term loans as being riskier. Another downside is that they need to be repaid quickly. This can put a lot of pressure on your business if you cannot generate enough revenue to make the payments.
What Is a Long-Term Business Loan?
A long-term business loan is a loan that has a repayment period of more than one year. These loans are typically used for larger expenses, such as:
- Equipment
- Commercial mortgage
- Business expansion
Pros and Cons of Long-Term Loans
One of the biggest benefits of long-term loans is that they often come with lower interest rates than short-term loans. Lenders usually view long-term loans as being less risky. Another advantage is that long-term loans can provide you with the stability of a fixed monthly payment, making it easier to budget for recurring payments.
On the other hand, one of the biggest disadvantages is that they can be more difficult to qualify for. Long-term loans often require a higher credit score and more collateral than short-term loans. The terms and conditions depend on the provider, but some lenders may also require a personal guarantee. This means that you are personally responsible for repaying the loan if your business is unable to.
Short-Term vs. Long-Term Loans: Which Is Better?
Which type of loan is right for your business? The answer depends on a number of factors, including the amount of money you need to borrow, the repayment period, and the interest rates. To help you make the best decision, here are seven questions to ask:
- How much money do you need to borrow? A long-term loan may be the best option if you need to borrow a large amount of money. However, getting a short-term loan is wise if you only need to borrow a small amount.
- What is the repayment period? Short-term loans typically have a repayment period of fewer than 12 months. Long-term loans, on the other hand, have a repayment period of over one year.
- What are the interest rates? Short-term loans typically have higher interest rates than long-term loans. This is because lenders view short-term loans as being riskier.
- How quickly do you need the money? Speed of funding is another important factor to consider. Short-term loans can typically be funded much faster than long-term loans.
- How stable is your business? Lenders will also consider the stability of your business when deciding which type of loan to approve. If your business is well-established, you may be more likely to qualify for a long-term loan.
- What is your credit score? Your credit score is another important factor that lenders will consider. If you have a high credit score, you may be more likely to qualify for a long-term loan. Typically, the acceptable credit score for a loan is 700 or higher, but this varies from lender to lender.
- What are the fees? Be sure to ask about any fees that may be associated with the loan, such as origination fees or prepayment penalties.
- What is your capacity and character? The capacity to make monthly payments and the character to follow through on your loan terms (as well as accomplish what the loan money is intended for) are serious factors you should consider before choosing a loan to apply for.
Choosing the right type of loan for your business can be a difficult decision. However, by taking the time to compare the pros and cons of each type of loan, you can make the best decision for your business.
Get a Fixed Rate Business Loan from LendThrive
If you are looking for a business loan with friendly repayment terms and a longer duration, LendThrive offers fixed-rate loans for up to ten years. We can help you get the capital you need to grow your business.
LendThrive has helped small business owners get the funding they need. We are committed to providing you with the best possible loan experience.
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