How to Decide Between a Short-Term and Long-Term Business Loan

By Taxscan Team - On May 6, 2020 12:42 pm - 4 mins read

Business - Loan - Business Income - Taxscan

Businesses require capital infusion from time to time, based on the economic and global factors you may want to enter the new segment or revamp your present infrastructure. Capital is the first thing you need to grow your business, whether it is a small scale business or an established large scale organization. You might need capital for expansion, restructuring, or for growing in some different segment but there are various factors that are to be considered before you start looking for a financer. You need to analyze the current financial situation and the projected growth you are anticipating with the capital infusion.

Loans come with a risk, you should also check out the risk tolerance you have and how much capital would be sufficient to reach your goals.

Based on the business requirement, you will need to decide what type of loan will fulfill the business requirement and for how long you will need to repay it back to the lender.

Business loans can be long term or short term based on the repayment period and the financer terms and conditions. You need to look into the factors that can help you understand the type of loan you need for your business.

The following are some of the important differences in the long and short term business loans that you should know before applying for a loan with a financier.

Types of Loans	Long-Term Loan	Short-Term Loan
Collateral	Long term loans are riskier from the point of lender and thus require collateral from the borrower to be kept as a security. This collateral can be taken over the bank if the lender is unable to pay back on time. The market value of the collateral is assessed by the valuers and then the capital amount is decided by the lender. If the value is lesser than the amount required, the approved amount will be low.	Short term loans are less risky than the long term and usually don’t require collateral as security
Repayment period	3 months to 18 months depending upon the lender	Can be upto 10 years or more
Disbursement period	The process of approval takes time as the required documents are to be submitted along with the verification by the authorities	The disbursement doesn’t take much time as the collateral is not involved.
Documentation required	There are multiple documents that the borrower has to submit, ● Copies of establishment of business ● Documents verifying the business entity (Sole proprietorship, Partnership, Private Company or more) ● Business Plan has to be submitted ● Copies of government identity cards ● Documents for the collateral	Documents related to the borrower are required. a. Copies of govt id cards b. Business establishment documents
Rate of Interest charged	Lower than the short term loans	Higher rate of interest is charged because there is no collateral involved
Business requirements and goals	Long term loans are generally for businesses that are planning to enter a new niche or need capital to restructure the whole business	Short term loans are good businesses that are revamping the process or making some relevant changes
Types	Home loans, education, car, personal, Loan on the property, Loan on industrial equipments,	Overdraft, working capital loan

The factors that will clarify the differences and make it easier to decide on the type of loan you require are as follows:

Cash flow for running day to day activities: Does your business require regular cash flow to be paid to the labor and vendors involved? If you need more cash at hand then short term loans will not be suitable for you as these loans last for 6 to 12 months and the amount to be paid per amount is higher. You will tend to pay more every month leaving less cash at hand with you.
Understand your risk tolerance: Once you understand the difference in the short and long term loans, it will become that long term loans are riskier for the lender as there are more chances of the collapse of business or economy slowdown and many other factors that can diminish the business of the borrower but from the borrower point, it depends upon the type of the business which will be a riskier option for them.
Short term or long term business goals: The vision of the business defines how much capital it will require and subsequently the type of loan that will suit it. If you plan to enter a completely new segment which will require years to grow and nurture then long term loan will be beneficial as the payment amount will be low and you can keep the new machinery or the segment as a collateral with the lender. If revamping the current business is in your mind then a short term loan will fulfill the need.
Current State of the economy: The economy plays a critical role in business growth, there are some sectors that are soaring high and there are some which are losing the market. There are other global factors as well which changes the position of the market and bends the economy in the favor or against. You can keep yourself about the trends and global factors impacting your business segments. It will help in visualizing the right set of capital you will require.

There are multiple financers available in the market who are ready to help you out for your business growth. Public and private sector banks, NBFCs’ and other small financiers who are present in the market that are providing both short and long term loans to the businesses. The rate of interest of the loans depends completely on the financier and the current policies of the central government. You can also check if your business lies in the MSME segment as there are multiple schemes planned by the Indian government to promote and strengthen the businesses of MSME sectors. Generally, MSME loans are collateral-free and there is less rate of interest on the loan amount, this can come as a great help when you are looking for collateral-free loans.

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