All You Need To Know About Short-Term Business Loans and Long-Term Business Loans

Do you want to avail of a loan for your business but are confused about whether it should be a short-term loan or a long-term business loan? Or perhaps you don’t know the fundamental differences between these two kinds of loans? Then this article is for you. We will discuss the intricate details of short-term loans and long-term loans, discuss the differences and help you decide which loan is best suited for you.

Any business needs a smooth cash flow that is not often acquired by revenue and needs loan-driven financial assistance. You can procure any sum of money through short-term loans or long-term loans.

What is meant by Short-term Business Loans and Long-term Business Loans?

A short-term loan, as the name suggests, is a short-repayment tenure loan. However, accompanied by a huge rate of interest in general, still a great source to quench urgent requirements by providing immediate liquidity. So, it is a great resource for tackling sudden disasters, stockpiling essential raw materials, paying suppliers, and maintaining a steady cash flow. Sometimes, revenue collection is affected, so in such cases, such an amount of money is required to pay back to the suppliers. Additionally, taking a short-term loan needs no asset as collateral and also needs a lot less paperwork.

A long-term business loan provides a greater sum, and the repayment tenure is longer while the interest rate is lower compared to the short-term loan. This kind of loan typically provides a large sum and has a higher repayment period and thus is generally used to expand business by investment in new cutting-edge equipment or rent offices at new locations are other improvements involved in a company’s infrastructure. Since typically a higher sum is allotted as a loan, the company needs to put an asset as collateral, and thus the paperwork involved is also excessive.

Difference between short-term loans and long-term loans

The basic distinction between short-term loans and long-term loans which will help you and your business make an informed decision can be well explained through the following points:

The loan amount: An apparent difference between long-term and short-term loans is the amount sanctioned to the firm. Short-term loans usually procure a small amount of loan, which can usually be paid back without incurring a huge debt, whereas long-term loan sanctions a huge amount to a firm and have a high monthly repayment amount.

Collaterals involved: A long-term loan is usually provided for a longer period and the amount sanctioned is considerably large, often an asset is required as collateral in case of failure to repay. Short-term loans, on the other hand, issue a comparatively less amount to firms and thus do not need any collateral. Although sometimes short-term loan contracts involve indirect collateral.

Rate of interest: short-term loans don’t involve any collateral, thus the risk involved for the lenders is quite high. That’s why the interest rate charged in the case of short-term loans is quite high. Whereas long-term loans have long tenure and often need collateral and thus the interest rate is kept low.

Duration: Long-term business loans typically sanction for the tenure of five or more years whereas the tenure of short-term business generally is less than three years.

Paperwork: Paperwork is more complicated in long-term loans compared to short-term loans because of the involved collaterals.

How to decide which kind of Loan is ideal for you?

Liquidity requirements of the Firm: The cash flow cycle is the most important factor for a firm to choose its ideal kind of loan. Often, money is needed on short notice to pay back lenders and a short-term loan is ideal for this situation. You should opt for a short-term loan when you have an immediate due date, as failure to pay back might cause credit scores to fall and create financial distress for the business. Whereas a long-term loan is ideal for business expansion as when your business grows in the long term you can pay off the high monthly interest money.

Risk tolerance: Both long-term loan and short-term goal share their share of risks. It might seem that a short-term loan is the riskier one since it consists of high monthly repayment amounts due to short tenure and the high-interest rate but a long-term loan sanctions a huge amount of money for a long time, so not able to repay the money after having invested in the company will cause the firm to go into debt. Moreover, without a good financial history, a firm is most likely to not get long-term funding.

Financial stability of the firm: A small-scale firm that is just starting is bound to not have a steady cash flow and thus a long-term loan makes more sense at this point as it will allow the business to grow and pay off the loan in the long run. Whereas a wobbly business with unclear prospects should rely on short-term loans instead of long term as this might create a hefty debt.

Conclusion

Business loans are often the key to improving a business’s financial condition and lead to new dimensions through hefty investments. Short-term loans sanction money at a short notice, but it is at a high rate of interest and you should ideally avail it to pay off immediate demands whereas long-term loans are meant for business growth and investment and provide huge amounts of money for a longer tenure. To know more about house loans or learn about other important financial concepts visit the  Piramal Finance website.