Choosing Between Long-term and Short-term Business Loans

When you decide that you want one of the best small business loans to boost your business, you have to decide whether to apply for a long-term or a short-term loan. I would advise you to take some time to understand your business’s financial health so that you can choose a loan that matches your business needs. In addition to considering your business’s financial health, you also have to consider your risk tolerance.

You can’t decide between a short and long-term business loan if you don’t understand the difference between the two. I will review how you can choose between the two funding options and how short and long-term loans will affect your business.

Difference between Short and Long-term Loans

If you want to understand the actual difference between long-term and short-term loans, I would advise you to look at it from the lender’s perspective. Whenever a lender gives a loan, their goal is to ensure that they get adequate returns to cover the risks involved. The lender receives the returns in the form of payments and fees.

A short-term loan means that you are paying the loan within a short period, which is less risky for the lender. A long-term loan means you will slowly pay back the loan, meaning more risk for the lender and higher interest rates. In most cases, you will repay a short-term loan within one year or less. On the other hand, you could repay a long-term over several years.

Choosing Between Short and Long-term Loans

I advise every borrower to consider three important factors when choosing between long-term and short-term loans:

1. Your Cash flow

When deciding on the repayment term of a loan, you should ensure that you have enough cash flow to meet the loan installments. Even if you have the money, you wouldn’t want to repay the loan and cause serious financial strains on your business.

I wouldn’t want to be in a situation where I have little or no cash left to run the business after paying my loan. The loan installments will depend on the loan repayment period. If you take a short-term loan, you will pay large installments, but you will save on interest. If you apply for a long-term loan, you will pay small installments but more interest. You may want to look for online loans with monthly payments if that suits you better so you can factor it in with incoming monthly money, whichever way suits you better is what you have to look into.

Ensure that you are comfortable repaying the applicable installment. This will ensure that you won’t have very little cash left and strain to pay other bills or, worse still, delay your investments. I like making realistic projections about my cash flows and my business needs.

2. Your Risk Tolerance

If you want to succeed, you must be willing to take some risks. The risk that you are willing to take may vary depending on several factors. When choosing between long-term and short-term loans, the risks involved will depend on the context. Because a long-term loan takes longer to repay, it’s riskier than a short-term loan. However, if you take a short-term loan, you have to pay it back faster, meaning you must make large installments. Therefore, you might also say that a short-term loan is riskier than a long-term loan because the large installments may cause a financial strain. Therefore, I can’t give a certain answer on how much risk you should take when choosing between short and long-term loans.

3. Current and Future Financial Health

If you have certain short-term cash flows, you may take a short-term loan. However, if your short-term cash flow is uncertain, I would recommend a long-term loan. However, the loan you qualify for will depend on how long you have been in business. If you’re just starting, you may not qualify for a long-term loan because you have no established financial history.

I have been there, and I know it can be confusing to choose between short and long-term business loans. However, if you consider the factors outlined above, you will have an easy time choosing the ideal option.