Sometimes, your company needs a hand getting by when the market changes or unexpected costs arise.
During this situations, a business needs a bigger boost to push it to a new operating leve. In both instances, short- and long-term business loans are helpful. Learn more about these two loan options and the best time to apply for one.
Short-term loan basics
As the name implies, short-term business loans don’t stay on the books for long.
According to Rosemary Peavler in an article for The Balance Small Business, these loans usually last less than a year, with some terms as short as 90 days.
These smaller loans are great for businesses that need to build up inventory for busy times.
For instance, a retail shop might apply for a short-term loan to buy Christmas inventory in the fall so they’re ready when the holiday season strikes.
A manufacturing business that needs to pay for supplies before production begins might also use a short-term loan to help them get moving and bring money in.
Long-term loan basics
While short-term loans are for quick infusions of cash, long-term loans are for much bigger projects. According to NerdWallet, these loans are best suited for a business making a major investment or expanding.
Long-term loans have more options, with some of them having terms up to 10 years.
While a business (and its owner, depending on its structure) needs to be in good order to qualify for either a short- or long-term loan, long-term loans are much harder to qualify for. The benefits of a longer loan period include lower interest rates and smaller monthly payments.
Which one to choose?
Choosing between short-term and long-term loans is fairly simple, as it depends on how quickly your business can pay back what you owe.
If the money from a loan is more of a bandage solution until you get more capital, a short-term loan is probably the right choice.
However, if your business needs a lot of cash to pay for something that might not produce income for a while, a long-term loan is a better option.
Another thing your business should consider when looking at short-term and long-term loans is which one you qualify for and how expensive it is to borrow that money.
If your business is NEW!
If you are a start-up businesses you may qualify for a short-term loan more easily than long-term loan. The funds might be enough to get you going, but the higher interest rates might make repayment harder than looking for other sources of cash.
If your business is long-standing
If your business qualifies for a loan with a longer term and is comfortable committing to payments spread over several years, the interest rate — or cost to borrow money — tends to be lower.
Choosing the right small-business loan is difficult, especially if an enterprise qualifies for different types. If there is any question about which term is best, consult your financial or business advisor.