Securing funding to fuel growth for your small business can be complex. The local bank used to be the only choice for loans.
These days there are a variety of online and alternative lenders along with a number of financial products to choose from. Take out the right loan from the right lender and you’ve helped set yourself up for success. Get saddled with an expensive loan from a predatory lender and your cash flow, business credit and working capital could take a hit. You might even get trapped in a dangerous cycle of borrowing.
APR, fees, ease of application, time to funding, and available customer support are important factors to consider. Perhaps the most important detail to consider is the loan term. How long will you have to pay back the money, and what will your repayment schedule be like?
Short-term loans and long-term loans are both widely available for small business owners. Below is some information you should know about each so you can make informed lending decisions.
Pros and cons of small business term loans:
- Short-Term Loans
- Short-term loans give borrowers a set amount of cash to be paid back over predetermined periods
- Short-term loans include interest and usually involve smaller cash sums and shorter repayment periods
- Most short-term loans reach maturity in less than a year, compared with long-term loans that may last for years or even decades
Short-term loans pros
Short-term loans are often easier to obtain than their traditional loans. Entrepreneurs can secure short-term loans through alternative online lenders and skip the bank. The criteria to qualify for a loan with short terms are usually less stringent. That means less paperwork and faster funding.
Short-term loans cons
- Cost: You’re probably looking at higher interest rates and more fees than a longer-term loan. It’s very important for small business owners to calculate the true cost of a business loan, including fees. Predatory lenders tend to be tricky when presenting costs. The best way to find the true cost of a loan is with the Loan Constant. It’s an easy way to discover how much you’ll pay for the money you’re borrowing.
- Risk of Debt Trap: According to NerdWallet®, the speed and ease of short-term business loans can become addictive, as business owners might be enticed to refinance and roll over the debt into a new loan. Repeat refinancing is a common issue with funding like merchant cash advances. Business debt consolidation with a low-cost long-term loan is a great solution if you find yourself in debt trap trouble.
- Frequent Payments: Daily or weekly payments on a short-term loan are common. The payments might be smaller but more difficult to make if you have unsteady cash flow. SmartBiz® customer Terry Trumbull, took out a short-term loan that required daily payments 25 days a month. “That really hurt my cash flow and it wasn’t helpful in reaching my overall financial goals,” he said. Trumbull ended up taking out an SBA loan with low rates and long terms. He’s now growing his business and saving money.
Generally, long-term debt refers to any financial obligations that extend beyond a 12-month period or beyond the current business year or operating cycle. When your business is looking to expand or make a large investment, a long-term business loan is the way to go. Here are the pros and cons of long-term debt.
Long-term loans pros
Obviously, a longer term means you have more time to repay the loan. You’ll also be able to use the money for an extended period of time, putting your business in a much stronger financial position. Longer terms means payments are very low compared to a short-term loan. With a SmartBiz SBA loan, you can pay off the loan anytime. Low payments help you better manage cash flow. Additionally, long-term loans are an excellent way to refinance high-cost, short-term debt. Many SmartBiz customers have refinanced short-term debt and now have the funds needed for growth initiatives like hiring, increasing marketing and buying inventory in bulk to get a lower cost.
Long-term loans cons
- Qualification: An established business, strong finances and a good credit score are generally required to qualify for a longer-term loan. Better credit scores usually equal lower cost funds.
- Requirements: Do you have an established business, steady income and a good credit score? If not, you might not qualify for a lower cost long-term loan. If credit scores are your problem, there are lots of resources out there to help you better manage your numbers. Search “credit scores” on this blog. We offer a wealth of information to help you understand your scores and work to improve them.
- More Paperwork: Because these loans are such a great deal, lenders want to make sure you are in a strong financial position to make monthly payments. Here’s where organization counts. If your books and finances are in order, the process can go smoothly. SmartBiz has an online platform that makes the application for an SBA loan easy.
If you’ve been in business two or more years and have strong credit scores you should strive to get a loan with long terms. A long-term loan is a great way to save money and grow, and SmartBiz can help show you how to get an SBA loan.
WHAT YOU NEED TO KNOW: The SmartBiz® Small Business Blog and other related communications from SmartBiz Loans® are intended to provide general information on relevant topics for managing small businesses. Be aware that this is not a comprehensive analysis of the subject matter covered and is not intended to provide specific recommendations to you or your business with respect to the matters addressed. Please consult legal and financial processionals for further information.