What’s the difference between long-term and short-term business loans? A long-term business loan involves multi-year repayment terms following a detailed application process. Short-term loans for Micro, Small and Medium Enterprises (MSME) provide quick access to capital, sometimes in as little as 72 hours.
Whether it’s working capital or some other type of MSME business loans the amount of money you need to borrow is probably your top priority when looking at loans. After all, if you don’t borrow enough, you’ll end up needing another loan. Borrow too much, and you may not be able to pay it back on time, regardless of it’s a long-term loan vs. short-term loan.
However, the length of your loan term should be one of the biggest factors you consider when shopping for a business loan. Choosing between short-term loans and long-term loans can affect everything from how much money you can borrow to how much interest you’ll pay
Short-Term Business Loans
- For most MSME entrepreneurs, a short-term loan is the way to go as it allows them to get the money quickly.
- You might even be able to be approved and have money in your account in as little as 72 hours. It’s almost impossible to find a long-term loan that can do the same.
- Short-term loans also provide the right amount of money for business owners.
- You often need to ask for a sizable amount of money to receive a long-term loan.
- A short term loan should be used for working capital and cash flow
- Short term loan tenure typically ranges from few months to up to 2 years.
- The lower amounts of a short-term loan make it easier to pay back the loan and get out of debt faster.
Essentially, short-term loans are an easier way for business owners to get liquidity and overcome financial setbacks, as opposed to taking on larger, more long-term debt.
Long-Term Business Loans
- Long-Term loan of financing involves multiyear repayment terms that can sometimes last for 5-10 years.
- While short-term loans may have higher interest rates at first, business owners who take on long-term financing typically end up paying more in interest.
- The longer your loan has a balance, the longer you’re paying interest on the money you borrowed irrespective of the economic cycles.
- It’s also generally more tedious to be approved for long-term loans. Your lender will want to make sure they’re lending money to someone who can pay it back. Many long-term loans are also for larger amounts than short-term loans.
- A long-term loan is usually best for business owners looking to make a significant investment to acquire assets that has lower Return on Investment (ROI) and provides break even over multiple years.
- For example purchase of land and building, machinery, company vehicle and acquiring business
- Business owners must never utilise short term loans to invest in acquiring above long term assets ( I shall write a blog on this topic very soon).
Which is Best?
Ultimately, deciding between short-term vs. long-term loans comes down to the specific needs of your business. For most small business owners, a short-term loan will likely be more suitable. However, sometimes long-term financing may be necessary.
Regardless of the length of your loan, it’s important to work with a lender who understands the needs and challenges of your business. Try to find a lender who can customise a loan program to fit your needs, instead of putting your business into a one-size-fits-all box.