If you need to get a loan for your small business, there are many sources to choose from, including national banks, local banks, credit unions, and non-bank, alternative lenders. Banks and lending companies offer the same types of loans, but their lending criteria can differ greatly. For example, banks offer lower interest rates, but they have difficult approval standards and collateral is usually required. Research shows that banks rejected 7 in 10 business loan applications last year. Conversely, non-bank, alternative lenders have easier borrowing requirements and higher loan approval rates, even for business owners with bad credit.
However, loans from non-bank lenders are often unsecured, and that means you will be paying higher interest rates than you would with a conventional bank loan. Regardless of which type of lender you choose, all loans have one thing in common: a loan term. You can choose a loan with a short or long repayment period. Before you make your decision, it pays to understand the differences between a short-term loan and a long-term business loan. This Balboa Capital blog post explains.
Short-term business loans.
A short-term business loan is similar to a conventional loan in that it provides you with capital for your company. The key difference of a short-term loan is, hence the name, a shorter repayment schedule. Most lenders offer short-term loans from $2,000 to $250,000, and terms typically range from 3 months to 2 years. This is an excellent option if you need funding quickly and do not want to be locked into a loan for many years. Making predictable loan payments over a short time frame is also more manageable, not to mention less stressful. Short-term loans can address your immediate cash flow problems and pay for daily expenses that do not require a long-term loan.
They are an ideal choice if you need to purchase inventory for an upcoming sale or promotion, or if you need to repair or replace an important piece of business equipment, or perhaps a business vehicle. Short-term loans can also be used to fill seasonal cash flow gaps so you can keep paying your bills and your employees when business is slow. As mentioned earlier, short-term loans are often easier to qualify for than long-term loans. You are in the driver’s seat if you been in business for at least one year and meet the less stringent credit score and annual revenue requirements of your lender.
Long-term business loans.
A long-term business loan is just what the name says. It is a lump sum of money that a small business borrows and pays back over a lengthy period of time. Each lender has its own borrowing limits, but long-term loans normally range between $50,000 and $500,000, and SBA-approved lenders offer loans of up to $5 million. Long-term loans can be from 3 to 10 years in duration, and banks, credit unions, and some alternative lenders offer them. This type of loan is a good option is you are planning to make sizeable investments in your business.
Some examples of this include office expansion, capital equipment purchases, and technology refresh programs. Long-term loans almost always have lower interest rates than short-term loans. That is because they are less risky to lenders. You might qualify for a long-term loan with an attractive interest rate if your business has a positive credit history, strong year-over-year revenues and minimal debt, and if you have the ability to put up collateral.
A short-term or long-term loan will increase your company’s existing capital so you can take care of daily operational costs and unexpected expenses, and invest in growth initiatives. If you are not sure which loan to apply for, talk to your accountant. Lastly, do not sign your name on a loan agreement unless you are confident that you can make the payments on time. Late payments will negatively affect your credit rating and hinder your ability to borrow money in the future.