Long-Term vs. Short-Term Business Loans

As inflation continues to grow, nearly half of businesses have reported taking out loans to manage inflation-related costs over the past year.

Many owners have found themselves in a position where they’re in desperate need of a loan but don’t know which one they should take out. If you’re in this kind of circumstance, read this guide! In it, we’ll discuss the pros and cons of long-term vs. short-term business loans and help you figure out which is right for you!

Understanding Long-Term Business Loans

You’ll pay back a long-term business loan over an extended time period, at least one year and rarely longer than 25.

The rates for long-term loans vary greatly depending on numerous factors, including but not limited to:

  • Industry
  • Business Finances
  • Credit Score
  • Time in Business

However, the most important factor is the lender you partner with. Where reputable, high-quality loans like those given by the SBA have low-interest rates, loans offered by alternative lenders have higher ones, with many in excess of 6%. Long-term loans are most commonly used to finance capital-intensive investments or purchases that a business lacks the working capital to handle alone.

Understanding Short-Term Business Loans

Short-term business loans operate over a much smaller period than long-term loans, with payment periods ranging from 3-18 months. Where a long-term loan requires monthly or quarterly payments, a short-term loan is paid daily or weekly.

Compared to long-term loans, applying for and being accepted for a short-term loan is generally easier. While these same factors are reviewed—industry, business finances, credit score, time in business—they aren’t scrutinized as harshly, with many lenders being able to fund your business within three days of being accepted. Short-term loans typically have higher interest rates, varying widely but generally between 7-50%.

Where long-term loans are used for serious business undertakings, short-term loans encompass a wider variety of tasks. They can cover immediate expenses, and unexpected emergency situations, or fill in for any temporary income gaps. Overall, they’re ideal for businesses that need immediate funding to help fill in for something they don’t have the working capital to handle.

Short-Term Loans vs. Long-Term Loans: What’s the Difference?

ParameterRepayment PeriodAverage Interest Rate

Difficulty to Acquire

Uses
Short-Term

3 – 18 Months7 – 50%Easy

Immediate Funding for Expenses and Emergencies
Long-Term

1 – 25 Years3.25 – 6%HardFinancing for Capital-Intensive Undertakings

Want to Explore Other Financing Options?

There are numerous business financing opportunities outside of short-term and long-term loans. Learn more about them below.

Explore Financing Options

Pros and Cons of Short-Term Loans

Now that we’ve reviewed the differences between long-term vs. short-term business loans, let’s dive into the pros and cons of these business loans:

Pros of Short-Term Loans

  • Fast Capital: They are a much more attractive financing option for businesses that need immediate financing. The applications are shorter, and the approval process and actual money transfer move much faster. This speed makes these loans ideal for businesses with severe cash-flow issues.
  • Easy Qualification: If your business hasn’t been operating long or you’ve developed a bad credit score from regrettable financial decisions, then long-term loans may not even be an option. If you find your applications continually being rejected, then a short-term loan may be the only avenue available. Fortunately, they are an excellent opportunity to build your business’s credit score.
  • Simple Applications: When compared to long-term loans, short-term loans are extremely easy to apply for. These simple applications mean you’ll be able to quickly fill one out to respond to any pressing business financing issues. Furthermore, this simplicity makes it easy to send out numerous requests to different lenders, maximizing your chances of success.

Cons of Short-Term Loans

  • High-Interest Rates: Short-term loans have higher interest rates, especially if you’re working with a non-traditional, alternative lender, which means you’ll pay significantly more in exchange for the same loan.
  • Frequent Payments: Short-term loans are structured differently, and require much more frequent payments on a daily or weekly schedule. This is a serious drawback if your business doesn’t have revenue consistency that makes these payments on such a frequent basis.
  • Substantial Debt: Between the enormous interest rates and constant payment requirements, it’s easy to rack up substantial debt with a short-term loan. Make sure to only take it on if you’re confident you can pay off.

Pros and Cons of Long-Term Loans

After seeing all the drawbacks of short-term loans, you may wonder if a longer-term loan is better. While they may not be better for every business, they do have singular advantages.

Pros of Long-Term Loans

  • Less Frequent Payments: Monthly or even quarterly payments give you an enormous amount of flexibility in acquiring and setting aside the money.
  • Lower Interest Rates: Lower interest rates mean you’ll be paying less overall, especially if you manage to secure a high-quality loan like those offered by the SBA.
  • Higher Funding Amounts: Long-term loans are designed to cover more intensive needs for businesses, so they provide much more funding than short-term loans will. Some long-term business loans will even provide up to $10 million with minimal interest.

Cons of Long-Term Loans

  • Low Approval Rates: Your business needs to meet some pretty strict requirements, If your business doesn’t have a good credit score and a history of meeting financial obligations, you will have difficulty securing a long-term loan.
  • Lengthy Application Process: The process of application takes a substantial amount of time to complete, and it takes even longer to hear back from the lender you applied to. If you have pressing financial needs, a long-term loan application may not be for you.

Solve Your Loan Troubles

Whether you need a short-term loan now or are interested in taking on a new project that requires a long-term loan, QualiFi can help you secure the loan you need. Contact us today to learn how we can help you get the loan you need.

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