Short-Term vs. Long-Term Financing: Which Is The Better Option For Your Business

If you are looking for money to start your business or to expand an existing one,  you have many financial options to choose from. When confronted with these many options, you should always know how to choose the right financing to achieve your goals with less strain. To get started you need to ask yourself whether you need short-term financing or long-term financing.

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From the names, short-term loans require you to pay them back in a shorter time while long-term finances can give you a long time before you start paying them. All the same, these financial aspects have other unique features that you should consider when looking to finance your business. To make an informed decision read below.  Short term vs. long term financing: which is the better option for your business:

Is Long-Term Financing the Best Option For Your Business?

Long-term financing gives you as a business owner a huge amount of capital for use for many years. If you have a long and documented history of finances, you have a high chance of accessing this type of financing.

However, financial experts at Nav advise that to know the best business loans you must understand the type of business you need financing for and the type of business needs that these particular businesses have. For instance, if you have business needs that must be addressed between a period of thirty-six months and beyond, then you should consider long-term financing. Should you choose long-term financing, you should consider the following factors:

  • Long-term finances are a good option for your business if you have a long-term project that you need to be financed. Likewise, if you have a certain strategic initiative for your company, long-term financing can help you accelerate growth.  You can align your long-term business strategy with the long-term finances to help you realize a higher return on investment. Since long-term loans have negligible restrictions on how you should use the money, it is easier for your company to use the money to meet as many and different business needs as you have. You can use the money to run marketing campaigns, opening new stores for your business, developing a new product line, and even catering to your advertisement costs.


  • If your business has been in existence for a long time, you are better suited for a long-term loan. Likewise, if you have a long financial history you can qualify for this type of loan. Often when you are looking for this type of financing, your lenders will be inquisitive about your credit history and the length of time you have been in business. You should have run the business for at least three years. Your annual revenue should be a six-figure digit for you to qualify for long-term finance.


  • This type of loan can also help you as a business to match the duration of your asset base with the period of liabilities you have for these assets. This way it is easier for you to plan your finances accordingly based on the lifespan of the assets you acquire to prevent losses that result from wear and tear.


  • Long-term financing can help your business enjoy the benefits of having a single investor for a long time.  It is easier for you to maintain your investment for the entire period you will be financing your business with a long-term loan. Long-term relationships with investors increase trust and mutualism. Remember, having to bring in new investors time and again can be detrimental to your business as new investors might not understand how your business operates. Before you make them understand the purpose of your business, you can waste a lot of time on the expansion and growth of your business.


  • Long-term financing can also save you the hustle of extra interest rate risks. These finances come with fixed-interest rates and thus you can reduce the refinancing inconveniences that come as a result of shorter debt maturities. You can as a result have a balanced sheet that is risk-free. With this type of financing,  you can diversify your funding sources. Since these loans have high flexibility for financing different capital needs, you can reduce dependence on a single source of finances. As a business, it can enable you to spread your debt maturities across different financiers.

With long-term loans, it is possible for you to extend and layer out your refinancing responsibilities beyond typical banking systems. With long debt maturities, you shall have minimal amortization and this can benefit you if you intend to buy out certain shareholders, if you want to venture into new acquisitions and if you want to purchase assets that can have a higher return after investment. You can easily expand with this type of finance.

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Is Short-Term Financing the Best For Your Business?

Short-term financing is a good solution for your business’s monetary needs if your business is small or medium in size. If you need instant money to run your business in the soonest time possible, this loan can be a better option for you.

The finances issued to people who borrow short-term loans often come from alternative lending organizations whose main purpose is to assist small businesses to access capital for short-term projects. If you choose this type of financing you will have the following benefits:

  •   A shorter application time and funds receipt. Since short-term lenders hardly require lots of complex documentation to approve your loan, it makes the application process easier. Some lenders have day-after application strategies where you receive your funds a day after you apply for the loan. If you have an urgent business project, then this is the best option for you.


  • Short-term loans also have small interest rates. Since you are required to pay back the money in a very short time, usually between months and three years at most, the interest you are charged is lower compared to the interest fees you would pay for a long-term loan.


  • This type of financing also has a higher approval rate. Since the application process is not very complex, it is easier for your loan to be approved. Remember the finances for such also come from alternative lenders who have higher rates of approval than traditional banks. These finances also come with flexible credit scores and thus your credit scores cannot be a big hindrance to your loan being approved. With this loan also, you do not have to provide any collateral for you to qualify for the loan.


  • Short-term finances are also flexible and can either be secured or unsecured. This however depends on the institution with which you are borrowing the money from.


  • The short period of repaying your finances can also help you focus on achieving your business goals before it is time for you to pay back the money. It can keep you on your toes and as a result, push you to grow your business faster and manage your finances better as you might want to qualify for more finances after a certain loan period lapses and anytime you have an urgent project that needs instant consideration.

So How Do You Choose Which Type of Loan You Require?

  • Determine your needs for cash flow. Time is a key factor anytime you need financing for whichever type of business; be it a small, medium, or well-established business.  The most important thing here is that you receive the money when you most need it and achieve your business goals on time.  Unfortunately, this doesn’t mean that you are safer with the cash at hand anytime you need it as this can also strain your business financially. Take, for instance, when you have a loan whose repayment time is due and you manage to pay it fully in time, and you are left with little money, you might be forced to cut down your expenses and this may slow your business activities.


  • To make matters worse paying your bills late can have you pay extra fees for being late and most likely you will have a poor credit score. This can limit you from accessing loans in the future. To avoid such inconveniences, you must be realistic. Make reasonable projections as regards the cash flow needs of your business. While making these projections have in mind any other expenses like recurrent expenditures which may affect your cash flow especially as you strive to meet your loan repayment deadlines.

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  • Understand Your Risk Tolerance. Any type of business you run must involve many risks except that the size of risks differs from individual businesses. While some business owners are willing to take bigger risks which might result in big profits if they succeed, others prefer to go slow and take small risks at a time. There is no single correct advice on the amount of risk you should take and so isn’t there sure advice on what particular type of loan is the most suitable for you.


  • Both types of finances have their own risks and it all depends on which particular risk you are willing and are capable of tolerating. These risks often rely on the context within which your business operates. However, you ought to understand that with all the factors maintained as constant, taking a long-term loan is riskier because of the long time you have to repay the loan.  Likewise for short-term financing, you will be required to pay huge installments at a go and within a very short time because of the short repayment period. In this case, if you think paying huge volumes of money at one particular time can make your business strain financially, then a short-term loan is riskier for you.


  • What is Your Current and Future Financial Status? You must ask yourself this question while choosing an ideal financial solution for your business.  If you have many viable opportunities that you need money to venture into, you can go for a short-term loan as it can help you research the niches and enter into the nicheS as soon as everything is ready. On the other hand, if your business has just started, and your financial cash flow in the short term is unreliable, then do not risk going for a short-term loan. A long-term financial plan would give you enough time to prepare, stabilize and finally have some extra money to pay off the loan. All the same, committing to loans with an exaggerated repayment period of thirty years and above is quite unhealthy for any business particularly if you are not sure you will run that particular business your entire lifetime.


  • Lastly, you must consider which type of financial plan you qualify for. If you are new in business and have no financial history to show forth to your potential lenders then you probably do not qualify for a long-term loan. In such a case a short-term loan would suit you the most.

If you are a small business owner, short-term financing is a good thing for you. The short period of approvals and application processes, higher approval rates, and absence of collateral are some of the benefits that come with this type of financing. The short repayment time can challenge you to concentrate on making more money within a short time so that you are able to pay back the loan in time. The interest rates are also low and ultimately you will save some money by going for this financing option.

For long-term finances, if you are unsure about a certain project yet want to give it a try, this option is good for you. In case your first investment fails, you can try others and by the time you are due to repay the loan, you will have found a good product to venture into.

The flexibility that comes with this loan is also a good thing to consider as you can diversify your business. However, consider your financial status, how much risk you are willing to shoulder, and the amount of money you want to borrow before applying for either type of loan. Don’t forget to assess your willingness to accept collateral and the period of repayment.