17 Jun Is A Long- or Short-Term Loan Right for Your Business?
A term loan for your business can help you restructure your debt to keep things running smoothly or purchase new real estate to expand your company. But choosing the length of your loan, long-term or short-term, depends on your financial profile. Both have unique benefits and drawbacks. The right fit aligns with your goals, cash flow, and repayment timeline.
This guide will help you navigate the decision between long-term and short-term financing options.
What is a Long-Term Loan?
Long-term loans usually last three years and can even go up to 25 years, depending on the lender and the purpose. Payments are made monthly. They are typically designed for business owners who are planning for the future. Lenders offer long-term loans to businesses with strong financial histories because they usually require a rigorous underwriting process.
Examples of long-term business loans include:
- Asset-Based Lending (ABL)
- Commercial Real Estate (CRE) Permanent Financing
- Small Business Administration (SBA) Loans
- USDA Energy Renewable Loans (REAP)
- USDA Business and Industry (B&I) Loans
- Mezzanine Loans
What is a Short-Term Loan?
Short-term loans typically last anywhere from three to 18 months. Payments are made more frequently, monthly or even daily. You could be approved for a short-term loan in a few days since it requires less strenuous documentation.
Examples of short-term business loans include:
- Merchant Cash Advances
- Equipment Leasing
- Unsecured Business Loans
- Business Bridge Loans
- CRE Bridge Loans
Comparing Short- and Long-Term Loans
When choosing between these two loan types, it’s helpful to break down the main factors that will affect your business:
- Loan Amount: Long-term loans typically offer larger amounts, up to several million dollars or 90% of your investment’s value. Short-term loans usually cap out at a lower threshold. Expect less than $1 million and around 60% of your investment’s value from short-term loans.
- Repayment Terms: You’ll repay long-term loans over years, while short-term loans often require repayment within months. A shorter repayment term increases your monthly obligation, but lowers the overall loan cost.
- Interest Rates: Long-term loans usually have lower interest rates because of their lower risk profile and extended repayment timeline. Short-term loans often have higher rates due to their quicker turnaround and limited underwriting process.
- Speed of Funding: Short-term loans are faster to secure funding. The whole process can take a matter of days. Long-term loans take longer to process, usually around one month.
- Approval Requirements: Short-term loans require lower credit scores and limited financial history than long-term loans, which require significant financial documentation.
When to Choose a Long-Term Loan
Consider a long-term loan for a strategic investment that will generate revenue over time. Some examples when a long-term loan is the best choice could include:
- Investing in high-cost equipment
- Buying out a competitor
- Expanding to a second location
- Funding a major marketing campaign
- Investing in a new production line.
In these situations, you need repayment terms that reflect the longer timeline of your return on investment.
One of the biggest advantages of long-term loans is the lower monthly payment. Because the repayment period is stretched out, you get more breathing room each month to manage your business expenses. Another advantage is lower interest rates since lenders have time to arrange the best terms.
Let’s say you are applying for a business acquisition loan to purchase a manufacturing competitor that will increase capacity by 40%. That’s a sizable upfront cost, but also an investment in future revenue. In this case, a long-term loan allows you to spread that cost over time, giving your business space to grow before you repay the loan.
When to Choose a Short-Term Loan
Short-term loans are built for speed and flexibility. You may have limited time opportunities for sudden growth, like stocking up on inventory for the holiday season. Or you may need to bridge the gap when you have an emergency repair. A short-term business loan works for these kinds of time-sensitive, low amount situations with quick returns on your investments.
Consider a short-term loan if you’re a newer business or have been turned down for more traditional financing. For example, if you need to refinance an expiring loan on your commercial real estate but struggle to qualify for a long-term mortgage, you could consider a business bridge loan to secure short-term capital. This covers a financial gap while you improve your credit profile and explore other options. Short-term loans like bridge loans use streamlined underwriting and minimal documentation to secure funding quickly.
Because the repayment terms are shorter, short-term loans often come with higher interest rates and more frequent payment schedules. Sometimes, you may need to make daily or weekly payments instead of monthly ones. This structure can be intense. You can manage it if you have a reliable cash flow and a solid plan for the funds.
Leverage Professional Guidance
Navigating the lending world can feel overwhelming, even with a clear understanding of the differences between long-term and short-term loans. However, you don’t have to make these decisions alone. Work with a financial partner who will help you compare loan options, assess your financials, and guide you toward a solution that fits your unique needs.