Accounting & Finance

Short Term Vs Long Term Loans: Which One is Right For Your Business?

Written by Melanie Doncas

When considering financing for your small business, it’s inevitable that you will find information relating to both short term and long-term business loans. While they may sound similar, each pose various benefits and setbacks for your business, so it’s worth understanding the differences between these loan types.

Today, we’re going to discuss both short term and long-term loans, as well as which one may serve your small business better. Let’s get started!

Firstly, Why is a Business Loan Beneficial?

To begin with, you might be wondering how business loans in general can assist your venture. While not all businesses will require a loan, many will need additional working capital at one point or another to boost their business.

Perhaps your sales dramatically decline at a specific time each year, or even rapidly increase (i.e. at Christmas)? In the first scenario, you’ll need a quick injection of cash to cover the daily expenses necessary to run your business, such as staff wages, purchasing inventory, etc. In the second scenario, you may suddenly find yourself in need of additional staff or inventory to cover these extremely busy periods.

Here are some other ways a business loan can assist your SME:

–        Buy equipment or machinery

–        Move to a larger premise

–        Expanding to another location

–        Renovations

–        Cover cash flow fluctuations

–        Take advantage of a new business opportunity

–        Advertising and marketing

–        Buy out a competitor

–        Pay BAS or tax payments

–        Purchase new furniture or fixtures

–        Invent or create a new product

Short Term Business Loans

Let’s begin by discussing short term loans. As their name suggests, short term loans are paid off within a shorter time frame than long term loans. Their terms usually range from 3 to 18 months and the loan can either be secured or unsecured. Due to their shorter repayment time frames, a short-term business loan usually has a smaller limit than a long-term loan, ranging from $5,000 to $250,000. These loans are also quite easy to apply for (particularly through a non-bank lender), with online applications often receiving an outcome within just 24 hours.

Long Term Business Loans

Long term business loans, on the other hand, carry longer repayment terms, often from 12 months to up to 30 years. Unlike short term loans, they are usually only a secured loan, meaning that you have to put up a valuable asset as collateral. Because of this, however, business owners can usually borrow a larger amount than with a short-term loan – usually anywhere from $250,000 to $50,000,000. Due to their secured nature, a long-term business loan is most often offered through a bank, as opposed to an alternative lender. This can mean longer application processes, as well as lengthy approval times.

A Comparison of the Pros and Cons of Each

To make your decision a lot easier, we’ve summarised some of the pros and cons of each loan type in a table below:

Loan Type Pros Cons
Short Term Business Loans Flexible – a short term loan can be secured or unsecured Shorter repayment periods, usually from 3 to 18 months
Quick and easy application process (which can usually be completed online) Lower borrowing capacity, often from $5,000 to 250,000
Not purely reliant on a good credit score
Fast approval times, often within 24 hours
Long Term Business Loans Longer repayment periods (usually 12 months to up to 30 years) Likely to be secured, therefore requiring collateral
Larger borrowing capacity (often from $250,000 to $50,000,000) Loans for larger amounts will have stricter lending criteria
Although interest rates are often lower, the borrower may end up paying more in interest as the repayment term is much longer

Which One is For You?

When it comes to choosing the right business loan for your business, it really is up to you to decide. After all, no one knows your business as well as you do. When it’s time to make your decision, there are some vital elements to consider, including:

  • How much you need to borrow
  • How quickly you require the funds
  • The type of lender you wish to borrow from (i.e. traditional or alternative)
  • If you need to put up collateral (and if so, what assets you can use)
  • If you can afford the monthly (or weekly / fortnightly / etc.) repayments

Armed with this information, we hope you can now go forth and make the right decision for your business relating to a small or long-term business loan. Best of luck!

“The opinions expressed by BizWitty Contributors are their own, not those of BizCover and should not be relied upon in place of appropriate professional advice. Please read our full disclaimer."

About the author

Melanie Doncas

Melanie Doncas is a content writer for Lumi, an Australian fintech (based in Sydney) specialising in small business loans. She is passionate about helping SMEs, entrepreneurs, and start-ups to grow their business.