Every business- big or small- requires business loans to expand its operations. While some people are reluctant to get a loan as they see the monthly EMI expenditure, taking a loan can prove to be a wise choice in the long run. It helps you keep your rainy-day funds intact.
By facilitating the cash flow and other needs, business loans act as a catalyst for your business’ growth. Choosing the best loan can help you capitalize on opportunities.
In this blog, you’ll learn about short-term loans, long-term loans, and how to choose the best amongst these two for your business.
Short term Loans
Short term business loan, as the name indicates, refers to the loan that is to be repaid in a short period. Generally spanning over a few months to a year, short-term loans can be used in funding businesses and can be repaid when customers pay their invoices. An example of a short-term loan is a working capital loan.
Features of short-term loans are-
- Quick access to credit– Generally sanctioned within 24 hours, these are used to address emergency projects. They have a fast application process if you meet the eligibility criteria of the lender.
- Unsecured loan– Short-term loans do not require any collateral and are hence unsecured business loans.
- Wider uses– While applying for secured loans you must specify the use of the fund, in short-term loans, you have the freedom to allocate the fund wherever you want.
Disadvantages of short-term loans are-
- High Interest– Since the principal is less, the rate of interest is generally higher.
- Penalty for early repayment– At times when you wish to repay the whole loan earlier than the tenure, you may have to pay a penalty as early repayment comes at the cost of the lender’s interest.
Long term Loans
Long-term business loans, as the name implies, are debts that can be repaid over a comparatively extended period. Spanning over 2 to 25 years, the length depends on the purpose you take the loan for.
Long-term loans are generally taken up by businesses for a long-run investment like that in infrastructure, real estate, etcetera.
Features of long-term loans are-
- Secured loan– Long-term loans are offered on sharing the collateral making them secured loans. If the borrower is unable to repay the loan, the bank takes over the collateral.
- Tax benefits– Few of the long-term loans- like home loans and unlike car loans- offer benefits in income tax.
- Lower rate of interest– Due to the astronomical principal of the loan and longer tenure, you may get the benefit of the rate of interest on your loan.
Disadvantages of long-term loans are-
- Collateral– Long-term loans require you to keep collateral mainly your property. In case you are unable to repay the loan, there’s a risk that your collateral may be kept by the lender.
- Affects your credit score– Long-term loans span over years. There are chances of you missing an EMI deadline which holds a position to lower your credit score and credit repaying credibility.
How to decide between short-term and long-term loans?
To capitalize on the opportunities, it is essential to choose the loan that best aligns with your business needs. To help you optimize on the credit opportunity, here’s a guide for you to choose the loan that best fits your business-
- Cash flow needs– Cash flow is the amount of money going in and out of business. Referring to liquidity, regular cash flow means you invest often, pay the laborers in a short time. In case of increased cash flow, it is better to take long-term business loans as these are at a lower rate of interest than a short-term loan.
- Consider your risk capacity– For some businesses, it may not be possible to take long-term loans due to their no or small credit history. In such cases, they are left with short term loans. However, if your business is eligible for both the loans, is it for you to ascertain the risk-taking capacity of your business in both the loans. Some find long-term loans riskier as they span for years and contain collateral, while others find short-term loans riskier as they involve large amounts to be paid every month.
- Purpose of your loan– Short-term business loans are taken up for common purposes like adding inventory, etc. Long term loans are taken up long-term investments like capital investment or real estate investments.
These were some of the most fundamental differences between long- and short-term business loans. While taking a business loan helps you ramp up your business, it is essential to be financially literate and read all the terms and conditions before applying for a loan. Consult professionals to avail more information about this topic.