If you think a loan from your financial institution could benefit your business, then you are likely wondering about the difference between short- and long-term loans.
Short-term loans are intended to help businesses in a variety of situations, but generally speaking, they help supplement insufficient cash flow. Considering the fact that adequate cash flow is crucial for your small business to continue its day-to-day operations, a short-term loan can play a vital role in its success.
Short-term business loans typically have a maturity term of one year or less, and in many cases, they are much shorter than that. Loans that need to be repaid in three to four months are common.
Short-term loans can be especially helpful to businesses that experience large seasonal shifts in revenue and expenses. Many businesses rely on income from tourists during the summer months, winter sports season or other popular vacation times, but they still need to cover expenses during the slow seasons. Other businesses make the majority of sales during the holiday season but need funds to purchase inventory far in advance. In these cases, a short-term loan could be a great solution.
“Other uses for short-term business loans are to raise working capital to cover temporary deficiencies in funds so you can meet payroll and other expenses,” states Rosemary Peavler for About.com. “You may be waiting on credit customers to pay their bills, for example.”
While waiting for customers to pay their bills, you likely have bills of your own that can’t wait. If you are going through a temporary cash shortage and need to pay your suppliers or other business partners, a short-term loan can help you make it through until your own customers pay up.
“This type of financing has more stringent qualifications than its short-term alternative,” states NerdWallet.com Financial Writer Steve Nicastro. “But long-term business loans are the way to go when you have an extra-large expenditure, such as a major piece of equipment or real estate.”
Because of their structure and the fact that they typically have stricter requirements than short-term loans, long-term loans may offer more favorable interest rates. This isn’t always true, however, so make sure to check with the rates your financial institution is offering before determining which type of loan will cost less in interest. Another thing to consider is that stretching out the repayment period can be beneficial for entrepreneurs who are trying to manage a big expense.
“With a longer repayment period comes lower monthly payments, making large investments easier to afford,” states Nicastro. “They are also a good option if you have an established business with strong finances.”
The best way to determine if your small business qualifies for and could benefit from a short- or long-term loan is to talk to your financial institution or adviser.
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