Gauri had a business of hand-made jewellery. She had a shop outlet in a Mumbai suburb and wished to expand her business in the other parts of the city. However, even though she was making profits, she did not have enough savings for this purpose.

She decided to go in for a business loan but had no clue which one should she take. She was confused between a long-term business loan vs short term business loan. She approached a financial professional associated with SME financing firm.

Following information was provided to Gauri:

What are long-term business loans?

Long-term business loans help you invest in upgrading equipment, buying vehicles for commercial use or setting up a new office. The repayment terms are for longer duration and range between 10 to 15 years. They may require collateral or limits on additional loans later.

What are short-term business loans?

Short-term business loans help you cover expenses like vendor payments, increase inventory, employee salary etc. They assist when you may not have sufficient cash on hand. Short-term loan offers flexibility and quick funding. These loans are beneficial to those companies that want to avoid long-term debt.

What are the pros and cons of long-term business loans?

a. Pros:

They are a good option for established businesses that require financing for their long-term funding needs. If you have great credit, you can qualify for these loans. If you can make a considerable down payment, you can also reduce loan costs.

b. Cons:

Long-term loans have a rigorous and long approval process and requires collateral. Although the interest rates are lower, the borrower may end up paying more interest since repayment terms are much longer.

What are the pros and cons of short-term business loans?

a. Pros:

They offer a faster approval and flexibility that is not possible with long-term business loans.

b. Cons:

Businesses that need more funding may not be able to get all the money they need from a short-term loan. If you are planning to acquire a business or need to upgrade equipment, a short-term loan will not suffice.

What loan to use and when?

The type of loan you choose entirely depends on your business needs and how you plan to use the loan. If you are a small business that’s just starting off but needs some immediate funds, a short-term loan is best for you. But if you are a small or medium sized business and have plans for expansion, you will need long-term financing to meet these bigger goals.

To sum it up

It is crucial for you to choose a lender who is patient and understands business needs of SMEs. A lender who has experience working with small businesses is a better choice than one that hasn’t worked with any. You might also be eligible for both loans but access your needs before you choose between long-term and short-term business loan. Consider all the factors mentioned above and make an informed choice.

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