You know running a business is not a piece of cake. You have to do a lot of things like making payments to your supplier, collecting payments from your clients and customers, investing money in marketing or buying some fixed assets for your business and many more; This all requires “money”, and sometimes you can run out of it.
Now, let us suppose that you get into some financial crisis and you need to raise money. What are the options do you have? The most common options which come into the mind of a business owner and this will also be coming into your mind are Long term business loans and Short term business loans.
Loan means borrowing or act of borrowing money from someone. Accept this, and no business can predict the future by 100% accuracy. There are always some issues which business could not predict and fell into the trap of cash shortage; This arises the need of getting money into the business so that it can prevail in the market. So which option a business owner needs to opt for in the financial crises?
To answer your question, let us tell you some basic differences between a short term business loan and a long term business loan. But to understand the difference, you have to put yourself in the shoes of a lender (A person who gives or lends money to someone.)
Short term business loan:
As the name suggests, a short term business loan is a loan given with the mutual agreement that a borrower (A person who took or got the money from a lender) will pay the money back to the lender with interest under one year; This means that a short term business loan is usually for one year or less.
Long term business loan:
As the name suggests, a long term business loan is a loan given to the borrower with the mutual agreement that he will pay the money back to the lender with interest within the set payment period which is longer than a year and can extend over a decade; This means that a long term business loan is always more than one year and can extend to even a decade with mutual consensus.
Which loan is the best option for you?
Up till now, we are on the same page that we need to borrow money because we have run out of it and we need money to sustain in the market. So what kind of loan will be a good or optimal fit for your business?
Well for this we have to establish why you need money and perks of opting for a short term business loan or a long term business loan.
Perks of short term business loan:
Benefits for opting short term business loans are as follows:
- Quick liquidity access: Liquidity means how quickly you can have cash. In short term business loans, you generally have quick access to cash which can help you have an immediate solution to your financial need.
- Quick application process: The application time for a short term business loan is generally much smaller as compared to the long term business loan. For example, there is a bank in Pakistan that processes a short term loan in 100 minutes.
- Saving on High-interest rates: Despite having a high-interest rate compared to the long term business loans, the borrower has to pay less and the end of a year as compared to long term business loans; This is mainly due to a small amount, so paying 15% on 50 thousand is much smaller than paying 5% on 50 Million. Right?
- Amount of money: The main perk of short term business loans is the small amount of money. Because of this, a borrower enjoys the above perks. Due to a small amount of money, there are many lenders hence quick access. A small amount of money means low to no background check hence quick application process. And a small amount of money means low-interest payments despite has rated.
- Several lenders: Since the amount of money is usually small, there are many lenders in the market which means that a borrower has a variety of lenders to choose.
Perks of long term business loans:
Benefits enjoyed by the long term business loan borrower are as follows:
- Prolonged payment period: Since there is a long period available for payback, a borrower has to pay a small amount every month; This makes him more cash-rich at the end of every month.
- Low-interest rates: Since the amount to lend is huge, and if the lender keeps a high-interest rate, no one will take the loan hence the lender has to keep the interest rate low; This results in attractive interest rates for a borrower.
Now, as you know the perks of the two business loans, you decide which one to choose, but this decision based upon your condition and the answer to the following questions:
- How much money do you require? It is always advised by every financial expert to evaluate the amount of money needed carefully. Because if you choose a small amount, you will require to take a loan again and if you over-borrowed the money you will have to pay extra interest. To evaluate your need very carefully. Example: Your real requirement was $100,000/-. You evaluated that you $50,000/- and got them at 15% interest per annum but during operations you will again have to raise $50,000/-, and you might get it on 20% interest per annum hence paying more on small payment. Similarly, you took $110,000/- at 8% per annum interest hence paying 8% more on $10,000/-.
- How long you need to pay the money back? The major factor in deciding the type of loan is to see when you can pay the loan back with interest. If you can pay a loan back in a year, you can go for short term business loans otherwise go for long term business.
The result of the discussion:
Every business needs money to operate smoothly. It predicts how much it requires for a year and how much it has in it. Now, if you have a deficit of money, it is up to you which option you opt for covering the shortfall. Either you are going for long term business loan or short term business goal. You have to evaluate how much money you need and when can you pay back the money keeping in mind the pros and cons of both type of loans and their impact on your business.