Long-term vs. Short-term Loans: Find the Right Fit for Your Business

Long-term vs. Short-term Loans: Find the Right Fit for Your Business

Introduction

During the course of operation, a business with coherent visions and sustainable growth plans will have to consider loan options. Most financial institutions regard loans that will last over three years highly because it makes them more money over time. Whether your loan comprises long or short-term agreements, all loans are generally impacted by everything from the amount you want to borrow to the duration you will repay the loan.

Short-Term Loan

A short-term loan is the loan that typically has to be repaid within one year, and has to be repaid with an interest rate over a designated duration of time. Many conventional financial institutions offer myriad forms of short-term financing such as a letter of credit, a bill of exchange, and overdraft amongst many others.

For majority of business setups, a short-term loan is usually a pertinent suggestion. This type of loan is easy to acquire and the funds is availed to you in a very short amount of time. According to David Gilbert, CEO and founder of National Funding, “Majority of the times, small to medium businesses don’t require long term financing, short-term financing is more convenient.”

Inherently, short-term loans are a convenient way for a business establishment to access ample financing to convalesce from financial shortcoming, and enhance sustained growth.

Pros

  • A quick strategy for acquiring finance.
  • Help overcome financial setbacks.
  • Allows business set-ups to exploit opportunities.

Cons

  • Tends to have high interest rates.
  • Doesn’t encourage long term investment needs.

Long-Term Loan

Long-term loans typically are for businesses or companies that have long term visions or goals, for instance, procuring a piece of property that will enhance sustained development in the future. It usually entails a span of five years or more. There exist two types of long-term loans: leasing and term loans. Although short-term loans tend to have high interest rates initially, business set-ups that choose long-term loans generally end up paying much more interest. This is mainly because long-term duration of time allows the loan to accumulate gradually. It is also used to qualify for a long-term loan since banks stipulate stringent qualifying standards due to its high risk nature.

Pros

  • More financial stability
  • Enhances a company’s ability to grow

Cons

  • Interest repaid over the long period is higher.
  • Difficult to acquire assets to qualify for this type of loan.

Which is the best?

Generally, the type of funding that is pertinent for you is highly dependent on your goals and needs. For small business set-ups, a short-term loan is suitable. However in some cases, long-term financing might be required.

On the other hand, long-term loans are generally for medium to large business establishments that focus in sustainable growth over a long duration of time.

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