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Long-Term vs. Short-Term Business Loan: Which is Best?

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At some point, your company may require securing a business loan. This money can be used for everything from working capital to expansion to acquiring a competitor. Typically, loans have been acquired from banks, although that is starting to change.

Before you apply for a loan, before you sign your name on the dotted line, you should compare the finer details of long-term and short-term business loans. They may appear one in the same, for the most part, but nothing could be further from the truth.

Long-Term Business Loan

These loans are commonly provided by large lenders, and most often used for refinancing, working capital, and expansion.

As expected, a long-term business loan is repaid on a monthly basis. When compared to short-term loans, these typically have a lower interest rate.

Note: you will find it easier to obtain a long-term business loan if you have a well-established business, or a younger company with a solid business and growth plan.

Short-Term Loans

If you want money in a hurry, without agreeing to a long repayment period, a short-term business loan may be the answer. This type of loan is typically used to raise funds for accounts payable, to purchase inventory, or to deal with a short-term cash flow problem.

Short-term loans are usually $100,000 or less and are due, in full, within a couple of years (at the most).

Note: seasonal businesses often rely on a short-time business loan to get them through a slow period.

How to Make a Decision

Now that you understand the differences between long-term and short-term business loans, it is time to make a final decision. Here are some questions that can point you in the right direction:

  • How much money do you require?
  • How are you going to use the funds?
  • When do you need the money?
  • Are you comfortable paying the loan back over the long term?

Once you answer these questions, you will have a better idea of which type of loan is best for your company. You may also want to look into the possibility of obtaining a grant as opposed to a loan. From there, don't hesitate to contact several banks or credit unions to discuss the exact specifications of your situation.