Short-Term Business Lending vs. Long-Term Loans: Key Differences & How to Choose

Most growing businesses eventually need financing to manage cash flow, fund expansion eventually need financing to manage cash flow, fund expansion plans, or invest in new assets. Short-term business lending and long-term loans are two of the most common options. Between changing inflation rates, market conditions, and the constant desire to acquire more customers, small business owners are frequently faced with questions of borrowing. One of the most fundamental questions is the choice between short-term business lending and a long-term loan.

Ultimately, the right financing option for your business comes down to your goals, cash flow, and the specific nature of your financing needs. Choosing the wrong type of loan can lead to excessive debt, strained cash flow, or missed growth opportunities, so it's crucial to have a firm understanding of loan options, eligibility requirements, and your own creditworthiness and financial profile before you apply.

In this article:

• The similarities and differences between short term business lending and long-term loans.
• Types of long-term and short-term loans, such as short-term working capital loans, short term cash flow loans, and more.
• Guidance on how to choose between short term business lending and long-term options.

Short-Term Business Lending Explained: When and How to Use It

Short-term business lending is characterized by its speed and immediate impact. These loans are designed to cover quick,emergency, or cyclical needs, so they act more as a financial bridge rather than a permanent financing solution. Like the name suggests, they tend to have short repayment periods, usually within a year but sometimes as long as two years.

Short-term business loan interest rates tend to be higher than longer-term loans, but may have faster approval and underwriting times.

Some of the most common uses for short-term loans include:

• Bridging cash flow gaps: The most common use of short-term business lending is managing cash flow volatility. For instance, if you have a large invoice due in 30 days but need to cover payroll this week, a short-term loan could give you a quick influx of cash to cover necessary expenses.
• Inventory purchases: Retailers or manufacturers often use short term business lending to buy inventory in bulk ahead of peak seasons, like a toy store gearing up in September for Black Friday and Christmas shopping.
• Emergency repairs: Short-term lending is a good option to get the cash needed to repair equipment.
• Seasonal working capital: Short term working capital loans can help seasonal businesses maintain operations in the slow season until revenue picks up in the busy season, like a coffee shop on a vacation island.

Types of Short-Term Business Lending

There are a wide range of short-term business funding options available. Many can offer very fast funding, greater flexibility, or a more streamlined loan application process compared to long-term loans. Some of the most common types include:

• Short-term loans: Term loans provide a lump sum of cash upfront that's repaid with fixed monthly payments. Short-term loans are available from traditional financial institutions and online lenders and tend to have faster funding times and less strict eligibility requirements than long-term business loans. They're useful for one-time, urgent expenses and provide a predictable repayment schedule that will help you budget successfully.
• Business line of credit: A line of credit gives you access to a maximum loan amount that you can withdraw from as needed. You only pay interest on the amount you withdraw. When you repay what you've borrowed, you can access the full amount again, making a line of credit great for managing variable working capital needs.
• Business credit cards: Credit cards are a very common type of short-term financing, as businesses can use them to make everyday purchases like office supplies or even some vendor payments.
• Invoice factoring or financing: While not traditional loans, these are popular short-term business lending options that provide quick access to cash flow. With factoring, you sell your unpaid invoices (accounts receivable) to a third-party factor at a discount in exchange for cash. They take on the responsibility of collecting the invoice. Invoice financing works similarly, except that you retain responsibility for collecting the invoice and then repaying the amount borrowed.
• Merchant cash advances (MCAs): Another non-loan option, an MCA is a commercial agreement in which a third-party pays you a lump sum now in exchange for a percentage of future credit card sales. Typically, the total amount you repay is based on a factor rate, and the repayment schedule depends on the agreement. MCAs may be available to business owners with bad credit or with limited time in business, making them a more accessible short-term solution, but they tend to have higher annual percentage rates (APRs) than traditional loans.

Pros and Cons of Short-Term Business Lending

Pros:

• Speed: Funds are often available quickly.
• Accessibility: Lower credit history, annual revenue, and time in business requirements than long-term loans.
• Flexibility: There are many types of loans available that can help address a variety of immediate business needs.
• Less collateral: While loans will typically require a personal guarantee, short term business lending may not have collateral requirements.

Cons:

• High cost: Short-term business loan interest rates tend to be higher, and may have larger origination fees than longer-term loans.
• Smaller amounts: Typically have lower maximum loan amounts.
• Quick repayment: Shorter repayment schedules require you to generate revenue fast to start making payments.
• Strained cash flow: Short-term solutions with daily or weekly payment schedules can put a financial strain on businesses.

What to Know About Long-Term Loans

Long-term business loans are designed to fund assets and strategies that will provide a return on investment over many years. They can help finance major capital expenditures and business expansion.

Some key applications include:

• Real estate purchases: Acquiring or building a commercial property, warehouse, or office space with a commercial mortgage.
• Major equipment purchases: Buying expensive, long-lasting machinery, production lines, or specialized commercial vehicles requires equipment financing that extends over the asset's useful life.
• Business acquisition: Acquiring an existing business or buying out a competitor may require a major loan.
• Expansion initiatives: Funding a major growth operation like opening a new brick-and-mortar store, developing a new product line, or entering a new market requires substantial capital expense.

Types of Long-Term Loans

Just like short term business lending options, there are several types of long-term loans available, although they're less diverse. Some of the most common types include:

• Term loans: Long-term term loans function similarly to short-term ones but offer extended repayment schedules, larger loan amounts, and lower interest rates. Longer-term loans may allow you to borrow more money, get a lower interest rate, or a lower monthly payment. However, you'll likely pay more interest in the long run compared to a short-term loan.
• SBA loans: The U.S. Small Business Administration (SBA) works with approved lenders to provide partial guarantees on SBA loans, thereby lowering the risk to both borrowers and lenders. Considered the gold standard of business financing, the SBA offers short-term financing solutions, but its most popular product is the SBA 7(a) loan. These loans offer large amounts, low interest rates, and terms up to 25 years, making them ideal for everything from real estate to working capital. However, the approval process is lengthy and requires stringent eligibility.
• Commercial real estate loans: Loans specifically used for the purchase or refinancing of commercial real estate typically offer the longest repayment terms.
• Equipment loans: Purchasing major equipment or machinery typically requires a long-term loan to offset the significant sticker price. With these loans, the equipment itself usually serves as collateral, which lowers the interest rate (provided you have a qualifying credit score) and makes the monthly payments more accessible.

Pros and Cons of Long-Term Loans

Pros:

• Lower cost: Competitive interest rates and fees compared to short term business loan rates.
• Large amounts: Sufficient for major capital investments, like expansion, equipment purchases, and competitor acquisition.
• Lower monthly payments: Longer terms typically lead to lower monthly payments over the loan's life.
• Sustainable growth: May be used to fund long-term assets that build equity and appreciation, like real estate.

Cons:

• Speed: Usually have longer loan application and approval timelines, which can take weeks or even months.
• Accessibility: Tend to have stricter eligibility requirements.
• Collateral intensive: Often require you to use valuable business assets as collateral.
• Inflexibility: May have prepayment penalties, locking you into debt for a longer period of time.

Is Long-Term or Short Term Business Lending Right?

Choosing between long-term and short-term business lending depends on your goals, asset lifespan, and repayment capacity. Evaluate ROI and cash flow before committing.

If you're funding an expense that will generate revenue or be fully used up within 3 years, short term business lending may make sense. For instance, if you're buying inventory, hiring seasonal staff, or want to fund a marketing campaign, the funding will be used quickly to generate revenue that you can use to repay it and get out of debt fast.

If you're funding a major asset that will generate revenue or provide value for many years, like a building or fleet of vehicles, then a long-term loan makes more sense.

In either case, it's crucial to consider your cash flow stability. Short term business lending, especially with alternative loans like MCAs, may demand frequent, irregular repayment that can strain your cash flow. Traditional loans provide greater stability and more predictable repayments.

Final Thoughts

Your financing strategy doesn't have to rely on just one loan type.  Savvy businesses often use both types of financing simultaneously to maximize flexibility.For instance, a manufacturing company may use a commercial mortgage to buy its factory and a business line of credit to cover monthly costs and buy raw materials every month. That's a great way to leverage both long-term and short-term business lending.

The key to mastering business financing is to view short-term and long-term solutions as not mutually exclusive. They can and should complement one another by addressing specific, strategic goals for your business.

FAQs About Short Term Business Lending

1. What is the maximum term for short-term business lending?

Definitions vary between lenders, but short-term business lending generally refers to loans with repayment terms of two years or less.

2. Can I use a short-term loan for equipment purchase?

You can, but it's generally not advisable for expensive, long-lasting equipment. The high payments of a short-term loan will put pressure on your cash flow before the equipment makes a serious contribution to your company's revenue.

3. Which type of loan is faster to get?

Short term business lending is generally faster, especially if you leverage online lenders or third-party factoring companies. These loans can take days. Long-term loans from traditional banks can take several weeks or even months to process.

4. Why are interest rates higher on short-term business lending?

Interest rates are higher on short-term loans because they're often unsecured or carry a higher risk for the lender. Lenders price these loans for speed, convenience, and accessibility for startups and businesses with bad credit. The shorter term limits the lender's ability to recoup losses over time, and the quick access to capital commands a premium price tag.

5. When should a business consider a long-term SBA loan?

A business should consider a long-term SBA loan when it has a major, long-term capital need such as purchasing commercial real estate, funding a large business acquisition, or financing a significant, long-lasting expansion project.

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