If you are looking to get a business loan, choosing the right one may seem confusing. Should you go for a short-term or a long-term loan? Both short and long-term loans cater to different needs of your company. Hence, the operations may differ slightly. The blog discusses the key differences between short-term and long-term business loans. It will help you analyse your needs better and select the one that best fits you. Let’s begin!
Short-term Vs. Long-term business loans: Definition
Short-term business loans are the financial facility that a business may use for a small period. It usually stays for up to a year. The monthly repayments stay higher than the long-term loans. Here is an example of a short-term business loan-
- Address urgent inventory requirement
- Emergency cash requirement for fixing infrastructure needs
- Releasing payrolls timely
Options likeLong-term business loans in the UK involve securing finance for a term of more than a year. You may get a higher sum in comparison to a short-term loan. Here is what you may use the loan for:
- Expansion
- Acquiring assets
- Investing in a new office, equipment
Short-term Vs. Long-term business loans: Interest costs
You generally pay a fixed interest on a short-term business loan. It is because the tenure stays small and allows one to budget easily. However, you may spot more competitive ones in comparison to long-term. Moreover, with a bad credit history, businesses may struggle to get affordable interest. However, you may prepare your profile before approaching.
You pay less than the one with an elongated period. Calculate the cost of borrowing by comparing the interest costs. You can use a verified business loan calculator for that. Choose the one with the lowest one. One non-repayment may affect your finances drastically.
Alternatively, you generally pay less interest on a long-term business loan. The extended loan term helps you split the loan costs into affordable instalments. You can calculate how much you can save per month for the loan payment. Accordingly, choose a loan term that helps you repay the dues comfortably. Don’t select a higher term unnecessarily. It may mean paying more interest in the due course. Contact the expert to select the right one.
Short-term Vs. Long-term business loans: Collateral and guarantor needs
Short-term business loans are generally for emergency and small cash purposes. You can only borrow funds for a short time. Hence, it eliminates the requirement of pledging assets as collateral. The loan approval depends on the company’s revenue status, credit score, operating history and other parameters. The better the financial management, the quicker the approval. Alternatively, businesses with low credit or operating history may need to provide extra proof. This comes in the form of a personal guarantee or a guarantor.
A personal guarantee is an agreement between the loan provider and the business. It is proof that you are liable to repay the creditor with personal assets if your business does not complete the debt you owe. However, don’t provide one unless asked.
Alternatively, you may need collateral on a long-term business loan. It helps you get more amount at low interest rates and affordable terms. It is generally an ideal situation for businesses with bad credit scores or low operating history. The asset value must be higher than the amount requested. You may consider a secured loan to finance needs like equipment purchase, renovation of office space, etc. However, you must repay the dues to claim your asset back.
Short-term Vs. Long-term business loans: Loan turnarounds
It generally takes a business day to complete the short-term loan transaction. This is because the process eliminates any detailed overview of the business finances. Instead, only a few proofs, such as recent bank statements, projects, and business plans, can help you get the finance immediately.
Alternatively, long-term business loans require more documentation and asset processing. You may opt for a secured or unsecured long-term loan, depending on your affordability and eligibility. Either way, the loan provider analyses the company’s finances deeply.
Thus, it may take more than 24 hours to get a long-term business loan in the UK marketplace. Moreover, the business loan provider calculates the Loan-to-value ratio for secured loans. It helps determine the value of the asset against the loan amount you need. Accordingly, he decides the amount to provide you.
You can ease the process by getting basic documents ready. Check your bank statements, passbooks, and business credit profile. It should be updated. Don’t forget to check your personal bank statements too. The loan provider may consider both before loan approval. Also, the loan turnarounds and purposes before seeking a secured long-term loan should be compared. If you can repay the dues comfortably and meet the criteria, go for an unsecured one. It helps you save time.
Short-term Vs. Long-term business loans: Monthly payments
Short-term business loans are for businesses with quick funding needs and are repaid within a short time. Due to the small term, the interest rates stay competitive. Hence, you pay a higher monthly instalment than a long-term loan.
The provider calculates the interest on the outstanding balance. Therefore, the amount is reduced with every monthly payment. This also decreases the interest payments. If you have a good credit rating, consistent business, and a decent operating history, you may qualify.
| Amount borrowed | £10000 |
| APR | 11% |
| Loan term | 12 months (a year) |
| Interest costs | £576.80 |
| Monthly instalment | £881.40 |
Alternatively, if you are looking to buy a business property or secure large funding, check long-term loans. It helps you split the costs of the loan into smaller instalments than a short-term loan. It is ideal for early-age businesses with limited funds or inconsistent business. You can pay according to the average revenue by choosing extended terms.
| Amount borrowed | £10000 |
| APR | 11% |
| Loan term | 5 years or 60 months |
| Interest costs | £2890.85 |
| Monthly instalment | £214.85 |
As you can see, you pay overall more on interest on a long-term loan. Therefore, check whether the loan provider provides early repayment facilities without penalties. Determine and choose the exact term within which you can clear the dues. Choosing a long-term business loan is only ideal for repaying huge borrowing amounts.
Bottom line
These are some prime differences between short-term and long-term business finance. A small-duration loan is ideal for current but emergency needs. It is ideal when your requirements don’t exceed £25000. Alternatively, you can check long-term business loans. It grants you more flexibility on funds and the repayment period. You may get up to £5m for your hefty business needs. Moreover, you can repay it in elongated monthly instalments.
Harry Kane is a financial writer and author who has covered wide topics related to business loans and finance for the last decade. He has been working as the Chief Contributor in finding out deals on various business finance products covered by Thebusinessfunds, a reputed business loan broker firm in the UK. The primary work of Harry is to analyse the loan requirements of various businesses according to their circumstances and affordability. He directly communicates with the loan aspirants and guides them to get the right loan matching their needs. He has a vast experience in finance writing, working with many major business firms in the UK. At Thebusinessfunds, Harry also used to write well-researched blogs covering the financial problems of business loan aspirants and providing relevant solutions. He is a postgraduate with MSc. in Banking and Finance.
