Long-Term vs. Short-Term Business Loans

Long Term Financing vs. Short Term Financing: A Detailed Comparison

The two biggest drivers for a business owner when choosing short-term vs. long-term capital for business fundings are the business's qualifications and, crucially, the use of the money for the company. The criteria for long-term business loans are indeed more rigorous, reflecting in their longer duration and potentially higher risk for lenders and larger funding amounts, as compared to short-term loans. Moreover, interest rate fluctuations might be a significant factor to consider with these business loans.

While long-term financing scenarios give affordable rates and terms if qualified, it isn't always the best fit for all business owners. Fast decision-making process and quick turnaround times might make short-term capital a more viable option.

Business funding is not a one-size-fits-all approach.

Let's compare the two so you know how they work and can weigh the advantage and disadvantage to determine the best options available for your business.

Long-Term Business Loans - An Overview

To dive further into the differences between long-term and short-term business goals, let us look deeper into each component. Below, we discuss the factors that come with a long-term business loan.

Loan Amounts: $250,000 to $1,000,000 (Higher amounts can be consider with significant revenue)

Repayment Terms: 3 to 25 years

Payments: Monthly Payments

Rates: 6% to 29% APR

Credit Requirements: Very Good to Excellent Credit (Typically FICO score greater than 680)

Annual Revenue Requirements: $250,000

Time in Business: Greater than 2 years

Financial Statements: 6 to 12 month Business Bank, Business Tax Returns, Year to Date Profit & Loss, Balance Sheet, Accounts Receivable/Payable Aging Reports, Financial Statement and may require additional

1. How Do Long-Term Business Loans Work?

Long-term business loans are defined as loans that have repayment terms of greater than one year in business with monthly payments.

• These loans, offered often at leading lending institutions such as Bank of America, typically exhibit lower interest rates and longer maturity terms than shorter-duration business funding products, enhancing their desirability by making them more affordable.
• The defining feature of these loans resides in their structured repayment schedule, which acts as a main attraction for borrowers.
• The flip side to consider is their approval difficulty. While they might be more economical in terms of lower interest rates, bear in mind that they are usually harder to get approved for, requiring lending institutions to rigorously assess the borrower's creditworthiness. Now, let's delve into the requirements and features of these loans.

2. What are the Loan Amounts Available for Long-Term Business Loans?

Due to the attractive terms, many long-term business lenders require a minimum loan amount because of the low rates and length of the term, which creates risk in of itself.

• Typically, you will see loan amounts at a minimum of $25,000 with some financial institutions and capping in the area of $1,000,000.
• These loans can significantly aid in expanding your product inventory or fueling business growth channels like marketing campaigns.
• With proper financial statements, you can see amounts in the millions if the business is generating enough revenue and profit.
• It's important to inquire whether the lender charges any origination fees in the process of determining the loan suitability for your business.

3. What are the Loan Repayment Terms for Long-Term Business Loans?

The duration of repayment for long-term business loans can vary, typically originating from a minimum of 1 year and stretching up to 7 years. However, there are exceptions such as SBA loans, which may have a maturity period of up to 25 years provided the proper qualifications are met. It's crucial to carefully consider this repayment schedule, as timing is a significant factor in the successful management of a business loan.

4. What are the Long-Term Rates for Long-Term Business Loans?

Rates for long-term business loans are based on principle and interest and are wide-ranging from 6% up to 29%. You may be asking yourself why such a big range in interest rates. Well, long-term business loans are risked based, so all of the requirements and documents requested are evaluated to generate an overall risk score, which will then relate to the rate you will be offered.

5. What are the Credit Requirements for Long-Term Business Loans?

This is not an easy answer. Often, business owners wonder about the specific creditworthiness criteria and the personal FICO score they need to meet the eligibility requirements for long-term business loans. A general rule of thumb mentions a FICO score above 680. However, credit evaluation is more complex, as it not only involves the FICO score but also takes into consideration the prospective borrower's financial integrity. Since the financial crisis of 2008, banks and credit unions have adopted smarter strategies, determining creditworthiness through their unique credit algorithms. These financial institutions scrutinize mortgage history, installment loans, revolving credit like credit cards, and formulate their own scoring model. The better the credit score and history, the more favorable the terms, such as lower interest rates and a longer repayment period, tend to be.

6. What are the Revenue and Collateral Requirements for Long-Term Business Loans?

Revenue requirements typically begin in the range of $250,000 annually. Business lenders have found that, barring factors like credit health, businesses with higher revenues tend to have better chances of servicing the loan leading to more reliable cash flow fluctuations, thus, enhancing the likelihood of repayment and place themselves in a position to enjoy added savings. It's important to remember that the work lenders do is largely indifferent to the loan amount, hence, lenders can earn significantly more from larger loans than smaller ones, attributing to the same amount of effort for loan approval, as well as loan servicing. In some scenarios, larger business loans might offer better rates than smaller loans, which hints at greater convenience and liquidity for the borrowing business.

7. What Financial Statement are Required for Long-Term Business Loans?

Long-Term business lenders will be considering the profitability of a particular business when making business loans. Unlike short-term financiers, they prioritize proper documentation and factual accuracy in assessing your ability to repay.

You will be required to supply essential papers such as;

• Comprehensive Application
• 6 to 12 months business bank statements
• 2 years Business tax returns
• Year-to-date profit & loss, balance sheets
• Accounts receivables, and accounts payables aging reports.
• Personal Fianncial Statement
• Use of funds statement

Not all long-term business loans will require all of the above, lenders reserve the right to request additional information for qualifications in the underwriting process.

8. What are the uses for Long-Term Business Loans?

Long-term business loans are specifically designed to support long-term objectives. Their typical uses include;

• Purchase of large equipment
• Facility renovations.
• They also serve to bankroll long-term projects that unfold over several years, necessitating longer times to reap benefits with delayed incoming revenue.
• Business acquisitions, which require large amounts that necessitate long terms to make the payment process affordable for businesses.
• As a financing example, you can start with a short-term loan to meet immediate needs and then transition to a long-term loan for more substantial investments or ongoing financing.

9. Who offers Long Term Business Loans?

The following entities provide long-term business financing;

• Federal, State Banks
• Credit Unions
• Approved Lenders/Brokers who offer SBA (Federal Small Business Administration-backed) business loans
• Long-Term Business Lenders
• Business Loan Brokers

Short-Term Business Loans - An Overview

Let us now look into short-term business loans and the key factors within them.

Loan Amounts: $10,000 to $1,000,000 (Higher amounts can be consider with significant revenue)

Repayment Terms: 3 to 24 months

Payments: Monthly Payments

Rates: 6% to 29% APR

Credit Requirements: All Credit consider (Typically FICO score must be greater than 500)

Annual Revenue Requirements: $180,000

Time in Business: Greater than 6 months

Financial Statements: 3, 4, 6 to 12 month Business Bank, Business Tax Returns (amounts greater than $100,000 to $250,000) additional docs may be require

1. How Do Short-Term Business Loans Work?

Short-Term business fundings such as short-term business loans, Future Sales Receivable agreements (MCA's) are defined as loans or fundings that have repayment periods of 4 months to 18 months with weekly or daily payments and have higher approval rates than that of long-term business loans. Invoice financing are another example of short-term financing, where the balance is repaid when the customer pays the invoice. This form of financing business loans can offer an alternative way to manage fluctuations in cash flow.

Despite their higher costs and shorter-term than long-term business loans, they are desirable options for businesses. These types of funding, known as factor costs, are typically riskier and require fewer prerequisites, hence, they are preferred by business owners eager for approval.

2. What are the Loan Amounts available for Short-Term Business Loans?

To reduce risk, short-term business funding ranges from as little as $10,000 up to $1,000,000. It's common for these loans to manifest as a lump sum, paid upfront. However, remember the potential for origination fees from the lender. The higher the amount, the more likely the business lender/funder may ask for additional information other than just bank statements. Amounts higher than $500,000 can be difficult to find due to the greater risk associated with more lax credit standards of short-term business financing.

3. What is the Loan Repayment term for Short-Term Business Loans?

The repayment schedule or the duration to repay for short-term business loans will typically be in the range of 4 to 18 months. This shorter duration is attributed to the greater risk involved, stemming from the more lax credit standards prevalent in short-term business financing.

4. What are the Long-Term Rates for Short-Term Business Loans?

It's very important to know that short-term financing products typically have fixed costs known as factor rates, which are very different from the principal in interest-rate loans. It's generally a fixed cost associated with the business funding whether you pay it off earlier or not, unlike principal & interest business loans. You get a fixed cost rate that ranges from 8% to 45% of the loan or funding amount.

For a Factor cost example;

$10,000 loan amount X 1.25% Factor Cost is a payback cost of $12,500. The difference between the loan amount and the payback cost is $2,500, which is your factor cost or interest.

Some of these products offer an early pay discount, which is a percentage off of the payback. This varies from lender/funder but is not the same as principal & interest remaining. Therefore, it's important to weigh the cost of the money versus the benefits that money will provide to your business.

5. What are the Credit Requirements for Short-Term Business Loans?

The good news is that short-term business financing allows the business funder/lender to take on higher risks by lowering credit standards because, quite simply, they are getting their money back faster than longer-term products! This flexibility in short-term business financing is due to looser eligibility requirements as compared to long-term business loans. Fico credit scores can dip as low as 500, encompassing Subprime levels, and can also reach the highest possible scores. The borrower's creditworthiness is indeed a significant consideration in short-term business loans. The better the credit score, the lower the rates and costs associated with short-term business funding products. Hence, improving your credit rating becomes crucial when trying to secure the best offers.

6. What are the Revenue and Collateral Requirements for Short-Term Business Loans?

There is more flexibility in revenue requirements than that of long-term business loans, and personal collateral is rarely required. The ability to easily attain liquidity is a key advantage of short-term loans for businesses, specifically with alternative lenders like online platforms, who understand the unique requirements and cash flow fluctuations of a company. Generally speaking, a business must deposit a minimum of $15,000 per month in sales through a business bank account month over month to qualify. This method is ideal, especially when managing savings and adjusting to the ups and downs of business finances. Importantly, there is no limit to the amount of revenue that a business can deposit annually.

7. What Financial Statement are Required for Short-Term Business Loans?

In general, the requirements for short-term financing are much less than the long-term alternative. The primary documentation needed generally consists of;

• 3 to 4 months of business bank statements, which serve to qualify your business for funding.
• Some lending products may also request Merchant Processing Statements (if applicable)
• Business tax returns are typically not required unless the loan request is greater than $100,000 to $250,000 and above.
• Certain situations where there is noticeable seasonality to the business, there might also be requests for additional bank statements and/or account receivable reports.

8. What are the uses for Short-Term Business Loans?

By far, the biggest reason for short-term financing is business working capital. Managing the business's cash flow is often a challenge, regardless of the size or type of the company. That's where short-term business financing comes in; it moves the decision-making process to the business owner, enabling them to reassess needs throughout the year. However, this also means they may bear disadvantages such as shorter repayment terms and potentially higher interest rates. Nonetheless, these loans allow for urgent needs that may not be eligible for financing through long-term products like business expansion, equipment, supplies, and software. This means the personal assets of small business owners could potentially be at risk for payments should the business default on the loan.

9. Who offers Short-Term Business Loans? 

The following entities provide long-term business financing;

• Short-Term Business Lenders/Funders
• Online Business Lenders
• Business Loan Brokers

Short-Term vs. Long-Term Financing: A Detailed Verdict

The big elephant in the room is simple. Long–term financing is clearly more appealing because it offers the ability for the business owner to access more capital at more affordable terms.

But life isn't that simple, is it? Long-term financing is not for everyone whether you want it or not! It's difficult to qualify for long-term business loans. Period, Full stop. It is not an option for many business owners; especially the smaller business so don't go thumbing your nose at short-term lending products because it's the fastest-growing segment of the business funding market as of 2024 for a reason.

The true answer is that short-term and long-term business loans are both valuable tools that need to be explored and evaluated to determine what is the best available option and solution to solve the problem, which is acquiring money for the business. So, take your time, explore, evaluate, compare, and then decide.

One thing is for sure, there will be times when the ability to grow your business will require the capital to do so, so be a good detective and discover the possibilities that fit best.