When choosing short-term or long-term business loans, think about how fast you need the money, how much you need, what your cash flow will be over the life of the loan, and how quickly you want to clear the debt.
Short-term business loans have quicker approval times compared to long-term loans, making them better when you need financing fast. Many can be approved online, making the application process simple, whereas long-term loans may require you to show up to a physical location like a bank branch, and they may take a couple weeks to process. The faster turnaround and shorter payback periods with short-term loans come at a higher interest rate versus long-term loans, but you can also pay less in total interest since the payback period is shorter.
Long-term loans have a longer time until approval, but they provide larger amounts of money and come with lower interest rates than short-term loans on average. This makes them better for larger investments and when keeping monthly payments low is important. But because the debt is paid back over a longer term, it’s going to stay on your credit score longer and the collateral you use will not be available to sell or upgrade unless you can get the lender’s approval.
Here’s a quick overview comparing the advantages of both options, but keep in mind that each lender has their own policies, and each applicant gets their own creditworthiness score, so the terms may differ when you apply.
| Short-Term Loans | Long-Term Loans | |
| Interest Rates | High | Low |
| Payback Periods | Between 1 and 3 years | Between 3 and 10 years with some SBA loans for real estate going up to 25 years |
| Loan Amounts | $5,000 – $500,000 | $1,000,000+ |
| Approval Times | 1 Business Day | Up to 90 days in some cases (i.e., SBA) |
| Credit Score Recovery | Faster | Slower |
| Monthly Payments | Higher | Lower |
| Flexibility of Funding Uses | High Flexibility | High Flexibility |
Sometimes the choice of short versus long-term is an easy one to make, like choosing a short-term emergency loan for immediate cash after a disaster where you only need to pay for cleanup and smaller expenses like a few new computers.
If you need to rebuild the structure or purchase a new plot of land to build on because of an emergency like a fire or tornado, a long-term business loan may be better because you’ll be able to make lower payments over a longer time frame while you recover the money.
Below is more information on what both types of loans are, as well as some more situations to consider so that you can make the right decision between short-term and long-term business loans based on your needs.
Short-Term Business Loans
A short-term business loan is any type of business loan that gets paid back within three years and generally ranges from $5,000 to $500,000. Short-term business loans are usually used for immediate needs like payroll, inventory, advertising, and equipment purchases. This is temporary financing and is good for situations where you’ll recover the funds quickly so that you can pay it back on time.
The interest rates tend to be higher than those of long-term loans because the payback period is shorter, and the lender needs to make a profit. The shorter time frame also means the debt clears more quickly. This removes it from credit reports, which may help to increase your credit score faster compared to a long-term loan.
Because the amount of money is lower and the time borrowed is shorter, there is less risk for the lender, making it easier and faster for a business to get approved. There are multiple types of short-term business loans including working capital loans, equipment financing, and traditional small business loans.
They’re available online through alternative lenders like us, credit unions, and large banks. SBA loans are government-backed, which caps the interest rates and comes with business support, but these can take 1 to 3 months for an approval, making them not ideal if you need financing fast.
Long-Term Business Loans
Long-term business loans have payback periods between 3 and 10 years, with some extending up to 25 years like SBA real estate loans and commercial business loans.
They are a good option for business owners who know they won’t be able to recover the revenue quickly, as the longer time frame reduces the cost of monthly payments. The interest rates on long-term business loans are normally lower than interest rates on short-term business loans, so they can help free up cash flow.
While short-term loans may have higher interest rates at first, business owners who take on long-term financing typically end up paying more in interest because the longer your loan has a balance, the longer you’re paying interest on the money you borrowed.
It’s also generally more difficult to be approved for long-term loans because there are more chances for something to go wrong with your business, increasing the risk for the lender. Many lenders with long-term business loans will require you to come to a physical location to apply, while most short-term business loans can be applied for and approved online. That makes long-term loans less convenient, especially if there is no local branch near you, which happens with agricultural business and farm loans in rural areas.
A long-term loan is usually best for business owners looking to make a significant investment. For example, you’ll probably need a long-term loan to build a new office space from the ground up and cover associated costs like property taxes, utilities, and professional services. It’s usually not a good idea to take out a long-term loan for smaller amounts due to the cost of long-term interest charges.
Choosing Between Short-Term and Long-Term Business Loans
Now that you know the main differences between short-term vs. long-term business loans, here are some common situations where you may have to decide between the two, and what’s usually recommended.
Equipment needs
Both short and long-term loans can help when something goes wrong with machines in a factory, delivery vehicles in your fleet, or computers in your office. Choosing the right term length comes down to weighing the costs of the loan (in terms of interest payments and monthly payments) versus the opportunity cost of the equipment being out of service.
When short-term loans are better
Short-term loans are better than long-term loans when broken equipment will cost you sales and potentially long-term customer satisfaction, as the faster approvals get you the financing you need to get repairs made quickly. You can also use them to lease new and used equipment to keep operations running at full speed while the equipment is in the shop.
Despite the higher interest rates with short-term loans, you might pay less in total interest because the payback period is shorter, and if you’ll be making the money back quickly with the equipment, you’ll be able to cover the costs of the financing. Instead of focusing on the higher rate when making your decision, compare the total interest cost of the loan versus what you would lose in sales and long-term customer value if the equipment did not get fixed.
A short-term loan may also be a better option than long-term loans to buy new equipment when you have the cash flow to cover higher monthly payments and still have enough to keep operations moving.
The shorter term will make your total cost lower (total cost = purchase price + total interest). Plus, a section Section 179 deduction and bonus depreciation allow you to make deductions for a lower tax bill to offset the higher monthly loan payments.
When long-term loans are better
If you’re planning on expanding your business and need to purchase new computers and servers, or buy machinery and equipment for future use because it is now on sale, long-term loans are better than short-term loans. This is because the lower monthly payments give you more cash flow as you work toward growing.
With the lower interest rates and longer repayment time frame, you’ll be able to absorb the debt more easily. After all, these factors help you free up cash flow with lower monthly payments. You’ll have more time to hire and train staff, purchase raw materials and prep them, and line up additional customers all while the machinery and equipment are being ramped up to full capacity.
Real estate purchases
When choosing between the two for land purchases, it comes down to how long you have until the investment becomes profitable — and the speed at which you need to act.
When short-term loans are better
Short-term business loans are better than long-term business loans when buying a property available at auction or when securing a lease that has just opened up, as short-term loans are approved more quickly than a traditional long-term business loan. By going with short-term business loans, you don’t lose out to someone else, and you can refinance later and reduce your monthly expenses. You can also try a business bridge loan to secure the deal and refinance it into a long-term loan for the lower monthly payments.
When to choose a long-term loan
For corporate real estate purchases and large-scale properties that will take a long time to become profitable, a long-term business loan will be better than a short-term business loan as you’ll need to keep cash flow open.
The lower monthly costs provide flexibility for construction, which could include creating office buildings or strip malls. They also work if you plan on sitting on the property as an investment since there won’t be any revenue in the near future. You’ll have extra cash flow for purchasing signage, advertising extra office space that you need to rent out, adding details to your reception, and renovating during the term of the loan.
Pro-tip: Try recasting your long-term loans if you’ve been making payments on time each month. Recasting lets you pay a lump sum toward your principal, reducing your monthly payments.
Cash flow gaps and expansion opportunities
Excess cash flow is a blessing, but disasters can happen in which you need financing to keep operations moving. Similarly, when an opportunity for growth comes along and eats up your reserves, access to extra cash comes in handy. Other times, there may be market downturns where you’ll need the financing to keep your business going. In any of these cases, both types of loans can make sense, but certain situations make one solution better than the other.
When short-term loans are better
Short-term loans are better than long-term business loans for cash flow gaps when you need to:
- Make payroll on time while waiting for customer payments.
- Chase inventory for popular or seasonal products.
- Deal with unexpected expenses like restocking a walk-in after a power outage or upgrading software, computers, or a point-of-sale system.
If a busy season is approaching and you have to make payroll while you train new team members or stock up on inventory, short-term payroll loans are better than long-term. You’ll get the funding you need to pay the staff, and you’ll have the cash flow to pay the loan back once the busy season is over.
The same applies to increasing inventory if there is a larger-than-expected demand during the season. The speed of getting approved for inventory financing lets you strike when the opportunity is hot rather than missing out on the sales.
Short-term business loans are also a great option to cover unexpected expenses like a power outage causing produce in your walk-in to go bad or your point-of-sale system going down and needing to be replaced fast.
When long-term loans are better
Long-term loans are a better choice than short-term business loans when filling your cash flow gap requires a strategic shift in your business. For example: If you need to come up with new products or find new markets for future growth, the lower monthly payments of a long-term loan allow you to continue investing without draining more of your cash flow compared to the higher payments of a short-term loan. This puts less stress on your business, allowing the development to proceed at a stable pace.
The same goes when you’re investing in research and development. There’s no telling how long it will take before a breakthrough happens, and you still need to get patents, find ways to produce, get the legal documentation, etc. The lower monthly payments come in handy here as you’ll have financial flexibility until development is done and funds are coming in steady.
If you need funding quickly and are able to pay it back fast, short-term business loans are better than long-term. If there is market uncertainty or you’re investing in long-term growth, long-term business loans will be better than short-term business loans as they come with lower monthly payments, and you can get larger amounts of funding.
National Funding does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only. You should consult your own tax, legal and accounting advisors.
