When seeking debt financing for your business, you may encounter short-term and long-term business loans. Business loans are often classified as short term or long term, depending on their term length. They are offered by banks as well as alternative lenders. Short-term and long-term business loans both involve borrowing money from a bank or alternative lender. However, that doesn’t mean they are the same.
Short-Term vs Long-Term Business Loans: What’s the Difference?
A short-term business loan is a form of debt financing with a short term. The term, of course, is the length of time that you have to repay a loan. Many banks and alternative lenders allow borrowers to repay business loans early. For term loans, though, they set a term, which is the maximum length of time borrowers have to repay the loan.
While there’s no universal definition for short-term business loans, most financial professionals define short-term business loans as having a term of no longer than a few years. Some short-term business loans have a one-year term. In other words, the bank or alternative lender will give you up to one year to repay them.
What Is a Long-Term Business Loan?
A long-term business loan is a form of debt financing with a long term. Like with short-term business loans, there’s no universal definition for them. With that said, long-term business loans all have a multiyear term that’s longer than that of short-term business loans.
Differences Between Short-Term and Long-Term Business Loans
You’ll have more time to repay a long-term business loan than a short-term business loan. As their name suggests, long-term business loans have a long term. Some of them have a five-year term, whereas others have a 10-year term.
Long-term business loans are typically bigger than short-term business loans. They are used to cover expansions, acquisitions and other expensive business activities. Short-term business loans, on the other hand, are typically used to cover smaller expenses. If you need additional capital to purchase new inventory or other operational expenses, you may want to obtain a short-term business loan.
Different lenders set different interest rates for their loans, but they usually set lower interest rates for long-term business loans than short-term business loans. Don’t let that fool you into thinking they cost less, though. Long-term business loans typically cost more than short-term business loans because they take longer to pay off.
Business loans that have a maximum length of time for which you can repay them are known as term loans. Those with a short term are known as short-term business loans. Those with a long term are known as long-term business loans.
This article was brought to you by Intrepid Private Capital Group, a Global Financial Services Company. For more information on startup and business funding, or to complete a funding application, please visit our website.