How to Choose Between a Short Term and Long Term Loan

Businesses need financing at one stage of its development. It could be startup funds, growth, expansion, fixed or working capital.

The type of loan facility depends on the need. Long term loans are ideal for equipment purchase, real estate ventures or huge contracts. Short loans are preferable as working capital or emergency funds.

Short and Long Term Loans

Finance Sources

There are several ways businesses get finance. They could use personal savings or borrow from friends and family.

Other ways include getting investors, crowdfunding and sale of equity. More are through bank loans, contributory schemes and partnership arrangement. The most common type of fundraising is through bank loans.

• personal savings
• borrow from friends and family
• investors
• crowdfunding
• sale of equity
• bank loans
• contributory schemes
• partnership arrangement
•  Setting up an insurance company
• documents to secure term loans

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Types of Bank Loans

A loan is a borrowed sum to be paid back at a later date. The loan generally attracts interest on the said sum.

The pre-determined payback period is the maturity date and the interest that it incurs may have a fixed or variable rate. The bank loans are either short term or long term loans.

Duration of Loans

The duration of loans fall into long and short term loans. The repayment period determines the category of the loan.

A loan could run for three months to one year or more. Loans that have maturity periods not exceeding one year are referred to as short term loans.

A long term loan could range from one year six months to ten years. The terms of servicing the loans vary based on different parameters. There are different advantages and disadvantages between long and short term loans.

Long term Loans

Any loan with maturity beyond one year s regarded as long term loan. There are loans that mature in ten or twenty years depending on the instrument.

Long term loans are ideal for long term projects such as commercial property loans. Other purposes include expansion, purchase of property and equipment. The loan could be used for fixed assets, plant or franchising.

Why take a Long Term Loan

There are many advantages to long term loans. The applicant has a long repayment period and flexible monthly payment. Long term loans attract lower interest and ideal for big projects.

Disadvantages of Long Term Loans

There are more challenges associated with long term loans and the application process. The huge sum involves more stringent rules, higher risk and longer term interests.

The loan presents a higher volume restricts on monthly cash flow. The company needs to service the loan with regular payment to avoid default penalties.

Short Term Loans

Once the interest and principle is redeemable within a year the loan is regarded s short termed. Short term loans are ideal for working capital and operational expenses.

Other reasons include purchase of supplies, staff wages or emergency funding. The application process is less strict, quicker and easier.

The borrower faces fewer restrictions, fast approval and less documentation. There is less risk because of the small amount borrowed. The major disadvantages are higher interest rate and a cycle of repeat borrowing.