Understanding The Difference Between A Short And Long-Term Loan

If you have a startup, then you need to have financing in place to cover your costs for the foreseeable future. The last thing you want to do is launch your business and promptly run out of funds.

There are many options for getting financing, and one of the most common is getting a business loan. There are several types of loans you can get for a startup, and things can get very confusing.

You will need to understand what loan will work best for you by taking into account the term length of the loan, the interest, the repayment options, and any other variable that a financial institute might throw your way.

One of the most common sticking points is the difference between a short-term and long-term loan. To help you figure out which one would work for you, here is how each type of business loan works. 

Short-Term Loans

As the name would suggest, a short-term loan has a short repayment timeline. These types of loans can have repayment timeframes as short as a matter of days, and as long as one year.

The exact grace period is negotiated with the lender and is agreed to before everything is finalized. Short-term loans tend to be for smaller amounts, since the repayment period is so short. 

A cash advance would be considered a short-term loan. You can get some cash to cover an emergency or some other impending situation, and then have some time to pay it back.

When you apply for such a loan, you must provide your financial information. Businesses with credit issues may find that it is easier to get a short-term loan because of the small loan amounts. 

Benefits Of A Short-Term Loan

There are several benefits to getting a short-term loan. For one, they are easier to get and you can get your funds quickly. In some cases it may be as little as a day. You also won’t be in debt for a long period of time because of the short repayment timeframes.

There are many borrowing options for a short-term loan because of the relatively small amounts of money involved. You can shop around to many different financial institutions, including very small ones, to get what will work for you. 

That said, there are some drawbacks. For instance, you will have to deal with a higher interest rate with a short-term loan. The good thing is that since it’s a short repayment time frame, the total you pay in interest should be manageable.

There are also sometimes fees associated with these types of loan that help the lender reduce its risk. You will have to take these into consideration when negotiating your loan. 

Long-Term Loans

Long-term loans have longer terms for repayment. They can go as high as 30 years, and as low as one year. You can borrow more money with a long-term loan since you have more time to pay it back.

Of all types of small business loans, this is the best way for a business to get a large sum of money to invest back into the business or to catch up on some other repayments. 

The documentation required for a long-term loan must be more detailed than with a short-term loan. You will need to provide  financial statements, information on your debts, revenue projections, and more.

The process of getting a long-term loan will take more time than a short-term one because of how much money can be involved and the extended repayment time frame. 

Benefits Of A Long-Term Loan

Businesses enjoy long-term loans for many reasons. The biggest is that they can get access to a significant size of funds while also maintaining low monthly payments over a long period of time.

They also tend to come with lower interest rates than short-term loans, since a client would be paying a large amount over the long-term lift of the loan. Just like with a short-term loan, you can shop around to find the best rate for you.

The requirements for a long-term loan will be stricter than a short-term to reduce the risk to the lender. However, there are still many loan options available for you to choose from if you have a good credit score. 

In terms of the cons, long-term loans take longer to get approved. There are more requirements to meet, and the lender will want to be thorough in examining your data to make sure that you will be able to repay the loan and make your payments every month.

Getting a long-term loan also means being in long-term debt. You will have to make a determination on how much debt is acceptable for your business at the time of signing for the loan. 

You will need to take all of these factors into consideration if you are deciding between getting a short-term loan and a long-term loan. There are pros and cons to both, which means you may have to sacrifice an aspect of one type of loan to take advantage of the other type.

Once you’ve weighed all of the information, you can then make the choice that works best for your business. 

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