How to Know Which Loan is Right for Your Situation


Having the finances to run business operations is something that never really leaves an owner’s mind. But even having reserves of cash on hand or access to capital might not be enough in certain circumstances.

Consider this situation: A business has substantial cash flow for the interim but plans to inject new investments to fuel expansion. It will see a considerable squeeze on finances when it makes those moves. In that case, even having money saved up could fall short.

Securing financing is something that business owners know, but it’s essential that you receive funds tailored to your situation.

Short-term loans work better in some scenarios, long-term loans in others and there’s no single litmus test to tell you which one you need, but rather, an overall consideration of your entire set of needs.

  1. Define your scope of needs

Short-term loans work best when dealing with immediate needs like taxes and inventory, whereas a long-term loan would be suited for paying off a long-term asset like equipment and office fixtures. When borrowing this way, you avoid being saddled with a long-term loan that pays off a short-term budget item.

In most ideal cases, short-term loans serve the business owner best when he or she has an immediate need for financing. That need for as-soon-as-possible financing can come in many forms that businesses may otherwise try to plug with long-term fixes.

  1. Evaluate your repayment budget

Before taking on a long-term loan, business owners need to have a plan for repayment budgets. Longer-period loans carry extended repayment lengths, so you need to know that you’re using the financing right and will be able to contend with payments.

Often, businesses use long-term loans to finance real estate for expansion or entry into new markets or products and services. In doing this, they know the return they generate can pay for the initial investment. You’ll most likely be asked to put up collateral to secure a long-term loan, meaning property and other assets are put on the line.

  1. Develop a timeline

While you may have figured out whether or not you need a loan, when working with a traditional lender, weeks may pass and immediate needs can become festering problems. Paperwork that logjams short-term needs, and banks that are still lukewarm to commit to long-term lending to small businesses, make it difficult to get a loan in any respect. In that case, alternative lending solutions can be an owner’s best option. Merchant cash advances are one type of lending that cuts down on paperwork and processing to get business owners funds they need when they need them.

Upon examining your situation, it may come to light that short-term loans will provide you immediacy, and long-term may be more repayable — or neither type of loan structure may be right for you. In the end, it takes careful consideration of your entire scope of needs, repayment abilities and feasible timeframes in deciding any form of financing to pursue.

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