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When you are running a business, there comes a point in your life where you think about fundraising. Whenever your business is in some need of financing, there are several ways that you can explore. It can be done using your personal savings, raising funds through investors or the more common option, which is taking out a loan.
A loan is a borrowed sum of money, which has to be paid back at a pre-determined maturity date with interest that can be either fixed or variable rate. Each type of loan has its own requisites and advantages and disadvantages.
While there are several loan products out there, which are specifically made to meet your financial needs, such as equipment financing that can be used to assist in the purchase of new equipment etc, long term and short term business loans are great alternatives to meet your general financing needs.
There are several reasons why a business might want to obtain an additional funding such as to handle a short term cash shortage to hire additional staff for urgent needs and other such reasons. It is important that one should be aware and clear about the funding amount needed as it is one of the most important factors to consider when looking for the right lender. But, it is not the only factor one should also keep in mind as they seek funding.
The type of business loan that you want to take - short term or long term - is another important decision for your business as it impacts the repayment tenure and other aspects of short term and long term loan. In order to choose the right business loan for you, it is crucial for you to learn more about long term and short term business loans to establish which loan type is the best for you. To make an informed decision, you should first understand both short term and long term business loans and you should check the differences and similarities between the two types of business loans to understand which type of business loan serves your purpose.
What is a term loan?
Before we understand the differences between short term and long term loans, let us first learn what a term loan exactly is. A term loan is when a lender provides you a lump sum amount of cash that you have to later pay back, with interest and other fees, over a period of time. The repayment tenure of a business loan is one of the major factors that help to distinguish between a short term and a long term business loan.
What is a short-term business loan?
Short term business loans are designed to meet immediate funding needs and operate much like the traditional term loan explained above. If you are running a business and are facing some unexpected demands or expenses or you want to grab a business opportunity immediately, then a short term business loan can assist you with providing a flexible funding rapidly. You get a lump sum amount of cash that you have to repay on time with interest and other fees. Primarily, the loan tenure for a short term business loan is 3 years.
Following are some examples of Short term business loan:
Overdrafts: An overdraft means overdrawing from a current account. Overdraft is available to individuals for short term tenure. In other words, an account holder takes out more money for short duration of time that has been deposited in the account, but has to repay. You have to repay the amount overdrawn and you will be charged an agreed rate of interest on the same amount if the overdrawn amount is within the limits of a preceding agreement.
Bill discounting: Bill discount is another type of a short term business loan, which gets you instant cash back on your large purchases and you get discount on the credit sales. For this you are only required to submit the important documents that validate your transactions like invoices, transportation receipts, lading bills etc.
Why should one consider a short-term business loan?
Short term loans are the most appropriate loans to deal with unexpected events and need of funds. Unexpected events can include a sudden cash flow requirement to cover some expenses; a surprise project that calls for additional supplies or equipment, or an increase in demand for a product, short-term business loans can help you to cover them all. Unlike some other loan products, there usually are no restrictions on how you can use the funds borrowed.
What is a long-term business loan?
Long-term business loans usually have tenure of 10 to 15 years, and their interest rates are generally lower than those of short-term business loans, but it tend to differs from one bank to another. Because the time period on the loan is 10 to 15 years instead of months as in the case of short term business loans. Also, the loan amounts are usually larger and you will be required to make monthly repayments to avoid any harm to your credibility as well.
Following is an example of Long term business loan:
Letter of credit: A letter of credit is issued by the buyer's bank which states that a seller will receive the payment when all the terms and conditions regarding sale and delivery have been completed. Letter of credit is generally used in international business finance where buyer and seller are unknown to each other and the business transactions between the two is done on the basis of bank's credit worthiness.
Why consider a long-term loan?
Long-term business loans are often used to finance a specific, long-term project or strategic move for the business that is in a growth phase. And because these loans rarely have restrictions on how the money is used, a long term business loan is ideal to cover a variety of business needs - whether it's developing a new product or extending your offline stores to other states as well.
Which type of business loan is best?
In the end, the type of business loan ideal for you will depend on your business needs and what you plan to use the funding for. For many small business owners, a short-term business loan is often considered more appropriate as it helps businesses to get their funding quickly and start making it work for their business right away.
However, there also can be some small businesses that may find long-term financing more appropriate to meet their business objectives.
You can choose a short term business loan or long term business loan, whatever you find apt. But, it is important that you join with a lender who understands the needs of small businesses. Choosing a lender is one of the most important decisions when you are looking to avail a business loan, and you want to work with a lender that aims to help businesses succeed.
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