Pros and Cons of Short and Long-Term Loans
As a small business owner, it’s important to understand the pros and cons of short and long-term loans when considering debt financing options. A short-term loan, such as a credit card or business credit, may have a shorter repayment period and lower monthly payments, but it can also have a higher interest rate and can negatively impact your credit score.
On the other hand, a long-term personal loan can have lower interest rates and can be used for activities of daily living like health care or long-term care insurance. Also, it can also have a longer repayment period and may require a higher credit score.
Ultimately, it’s essential to consider your balance sheet and credit history when making a decision on which type of loan is best for your business. Additionally, long-term loans may also have advantages of long terms, such as lower interest rates over the life of the loan, and can be used to finance larger purchases or investments that will benefit your business in the long term.
Short-Term vs. Long Term
Understand short and long-term loans for small businesses.
These loan types serve two separate needs.
Which is right for you?
Advantage: You Should Receive Your Loan Quickly
The most obvious benefit of a short-term business loan is that it can provide you with fast capital for your operations. In addition, a short-term business loan application is typically shorter.
Then that of a traditional bank loan and requires less information. This can be incredibly useful if your business has expenses. That is due in the immediate future, and you cannot afford to wait on a long approval process.
Disadvantage: These Loans Come with High-Interest Rates
Since the application process is much more lenient than alternatives, most short-term business loans have comparatively high-interest rates. Compared to loans that are more exclusive or have longer terms, you will usually pay significantly more in exchange for the same loan amount.
The best way to minimize the total cost of securing additional working capital is to repay your loan as quickly as possible. This can be especially crucial if your financial institution provides an early repayment discount.
Advantage: The Application Process is Simple
As we previously mentioned, the application process for a short-term business loan is fast. In addition, it will likely be easy to complete. These loans require relatively little paperwork, and the applications can typically be completed online.
Disadvantage: You Will Have to Make Frequent Payments
A notable drawback of applying for a short-term business loan is that most of these loans require frequent payments. Many of these loans require weekly or even daily payments. You should consider other loan options if your business does not have a consistent revenue source. That might offer monthly payments or another type of flexible schedule.
Advantage: Easy to Qualify for
When compared to more traditional business financing options, most short-term business loans have remarkably high approval ratings. Even if your business has a limited or poor credit history, you are still highly likely to qualify for a short-term loan. The lender will still most likely want to review both your personal credit and business credit scores. But their requirements probably will not be as stringent.
Disadvantage: There is the Potential for Significant Debt
It is important to note that regardless of your financing product (whether it be a loan, line of credit, or credit card, to name a few examples). Acquiring any sort of business debt is inherently risky.
Generally, you should only apply for a loan if you believe you can repay your debt fully and on time. Otherwise, your business risks getting caught in a “cycle” of debt payments. This could be hard on your bank account and jeopardize your business’s future.
Is a Short-Term Business Loan Right for Me?
Short-term loans can be a beneficial way to finance your business. But that does not mean short-term loans don’t have drawbacks.
Before making any decisions, your business should consider all available options. If you can qualify for a lower-interest loan and your need for capital is not time-sensitive, then a short-term loan may not be the most suitable option. In addition, if your business will continue to experience cash flow gaps even after securing capital, you should not count on a short-term loan to completely resolve your current financial problems.
However, despite these risks, short-term loans can be helpful to your business. Suppose your business has relatively quick cash flow cycles, a reliable method for repaying your debts, and a strong potential to benefit from an immediate capital infusion. In that case, a short-term business loan might be right for you. Whether it makes sense to apply for this loan type depends on your business’s specific conditions and characteristics.
BitX Funding is an online marketplace for small business owners looking to fund a project. We specialize in connecting small business owners with lenders who will compete for your business. We believe small business owners drive the economy and are passionate about helping your company reach its full potential.
You can reach a loan specialist toll-free at 1-800-824-2407 or email [email protected] or apply online here, and we can guide you on which loans are the best fit for your business.