You might discover financing options that you didn’t know existed as you search for small-business loans. Term loans are a common term among all the new information. Term loans are a common way to finance your business.
Term loans are a lump amount of cash that a lender deposits directly into the business account of a borrower. The amount borrowed, along with interest, is repaid by the borrower over a set period.
You might not be aware that there are many variations of this theme, including short-term and long-term loans. There are also variations within these variations that we will discuss. The terms of long-term and short-term loans are different depending on their lengths. However, there are many other differences as well. For example, eligibility requirements, loan amounts, and interest rates can all vary greatly.
Although one type may be more appealing than the other, the loan you are considering might not be the right fit for your company. While you may be banking on a long-term, high-capital, low interest, long-term loan with high rates of return, a short-term loan may be more suitable for your company. This is especially true if your company is new and doesn’t have the financial stability or profitability that long-term lenders require.
Or, you might have the bandwidth and stats to get a longer-term loan. The decision can impact your bottom line in any way you want. Here are the facts about short-term and long-term loans.
What are the differences between short-term and long-term loans?
The repayment terms are what distinguish between short-term and long-term loans. A short-term loan is a loan that you will need to repay in 3 to 18 months, but usually less than one year. Long-term loans, as you can see, are meant to be paid off in a longer period.
It is more difficult to determine the typical repayment period for long-term loans to businesses. A long-term loan is a loan that requires 24-plus months to repay. However, this definition can be interpreted in a variety of ways. It all depends on who you work with, the financial situation of your company, the intended use of the funds, and the loan program that you are participating in.
Digging a Little Deeper into Long Term Loans
Let’s discuss what we mean by term length. A “long-term loan” in business lending can be used to refer to several financing products. We’ll be covering three types of long-term loans for today’s purposes:
Online lenders and banks can both offer short-term loans. You can expect a repayment period of between 2 and 5 years.
It’s not easy to get a business loan from one of the largest banks. But it is possible to obtain a loan from your bank. If you have been in business for some time, have a solid credit score, and have strong revenue numbers, institutional lenders will be more likely to approve you. The repayment terms of long-term bank loans typically last between 5-10 years, even longer if you are purchasing commercial real property.
SBA loans don’t come from the Small Business Administration’s (SBA) vaults. Instead, SBA loans are issued by participating lenders, and the government agency guarantees repayment. The SBA typically guarantees 75% to 15% of a loan in default, although the exact percentage will vary depending on the loan program and the loan amount. SBA-approved lenders are usually banks and credit unions. However, qualified alternative lenders and nonprofit corporations can also partner with the SBA.
SBA loans are among the most sought-after small business loans due to their guarantee.
There are a variety of loan programs offered by the SBA. Each program is designed to suit different purposes. The most popular SBA 7(a loan program is the SBA 7(a). These funds can be used for a wide range of purposes, including working capital, purchasing real estate, purchasing equipment, and refinancing debt. You can also use them to acquire a business or purchase new property. There are many uses that SBA 7(a) loans can be used for by the SBA.
The repayment terms for SBA 7(a), loans are determined by the borrower’s intended uses of funds. They can be up to 7 years for working capital, 10 for equipment, and 25 for real estate.
Additional Differences between Short-Term and Long-Term Loans
There are some important differences between short-term and long-term loans, aside from the repayment terms.
- Eligibility requirements
Long-term loans have historically been available only to the most qualified borrowers. Lenders are more likely to default on a long-term loan than they are on a short-term loan.
Lenders who extend large amounts over a long period need to ensure that they are working with borrowers that will pay back what they owe on time and in full. This usually means that established businesses with a long history of profitability are owned by people with good credit scores. Only a few businesses can meet these requirements.
Online lenders emerged in the wake of the 2008’s recession. These online lenders aim to make loans easier for borrowers who aren’t eligible for long-term loans. These lenders can provide short-term loans with lower requirements than bank loans.
It’s difficult to provide the exact requirements that you will need to be eligible to receive any type of loan, short-term or long-term. Your lender will decide if you are eligible and what the terms and costs of the loan will be.
Despite this, the following statistics might help you to be successful.
…and this is in addition to a host of SBA loan requirements.
Long-term loans may require collateral. This could be equipment, real property, or cash. The lender can also seize and liquidate the collateral to recover a defaulted loan. High capital amounts equal high risk. The lender must take serious precautions. On the other hand, short-term loans don’t typically require collateral.
You can only find out if your business is eligible for any type of loan by talking to a loan specialist or walking into your local bank depending on what type of loan you are applying for. These figures will help you determine if a loan is available for your company.
- Maximum Loan Amount
Long-term loans are more attractive than short-term loans because they offer larger loan amounts.
Again, the amount of capital a lender will lend to an approved borrower is dependent on the information given in the borrower’s application for a business loan. The amount of the loan depends on the lender and the type, especially with online lenders who have different loan products.
Short-Term loans: $2,500 – $250,000. The average amount of a short-term loan is $20,000.
Medium-Term loans: From $5,000 to $300,000. The average loan amount is $110,000
Bank Loans – $5,000 to $500,000.
SBA7(a) loan – Up to $5 Million, but the average SBA loan amount in 2016 was $417,316
You may be starting to notice a pattern here. As loan terms get longer, potential loan amounts rise and eligibility requirements increase. All of this goes back to the same basic concept: The lender will take more care to protect their interest if the borrower defaults.
- Cost of a loan
Loans are not free. You will have to repay the lump sum (also called the principal) plus the interest rate that your lender gives you.
As with all small business loans, the cost of any loan is not always predictable because each loan type and underwriting process are different. We’ll tell you what to expect about the cost of short-term and long-term loans.
- Short-Term Loans
Businesses are more likely to be approved for short-term loans than long-term loans. These alternative lenders offer more options for borrowers than banks and are often more flexible in approving loans.
Short-term lenders don’t have to enforce strict criteria to identify risky borrowers. They need another way to protect themselves in the event of default. Short-term loans are typically subject to higher interest rates than long-term loans. This extra cost allows short-term lenders to make more money on their loans even if the borrower defaults.
The speed at which your loan is processed will also be a factor. Short-term loans are available in as little as one working day.
Lenders will also charge higher interest rates for borrowers they consider extra-risky. This includes businesses with lower annual revenues and owners of smaller credit scores. Even though your credit score is not high you could still qualify for a business loan with bad credit
The cost of your short-term loan will depend on how the lender assesses your application for a business loan. You can generally expect short-term loan annual percentage rates to range from 8.5% to as high as 80%. The cost of interest and additional fees associated with your loan are included in the APR. This gives you a better idea of the annual cost of your loan.
A caveat. Although short-term loans are more expensive than long-term loans, they have a lower interest rate. Of course, the reverse is true often. The more you keep a loan open for longer, the higher your total interest rate over the life of it. A 10-year loan with a long-term interest rate will often be more expensive than a 6-month loan.
The only way to determine if a loan is worth it and how it will benefit your business is to calculate the cost of debt.
- Medium-Term Loan Rate
Medium-term loans can have an APR of 7 to 30%. Medium-term loans amortize, unlike short-term loans. You’ll pay the same amount each month, or every week depending on how you arrange your repayments. However, that payment includes two aspects: the principal and interest.
Your loan payment is divided into different amounts of principal and interest as you pay it down. Lenders often stack the first bills with interest to make it easy for them to get their money back quickly. The interest amount slowly decreases over time. This means that you will save interest if you can pay off your amortized loan quickly.
- Bank Loan Cost
Your interest rates will vary depending on whether your bank loan has a fixed term or a variable term. This APRs are among the lowest available, starting at 5%. Customers are important to banks, and they may reward loyal customers by offering lower interest rates.
- SBA Loan Rate
SBA loan interest rates are determined by market rates. However, for most loan programs, SBA sets a maximum rate at which intermediary lenders can charge borrowers. Rates will vary depending on the loan program, loan amount, and terms. Rates on the SBA 7 (a) program currently start at 7%. You might need to pay an SBA guarantee charge depending on the terms and size of your loan.
Are you looking for a long-term or short-term loan?
If you ask a borrower what type of small-business loan they are looking for, they will likely choose a long-term loan. Long-term loans are more attractive than short-term loans. You will get a higher loan amount, a lower interest rate, and more time to repay your loan than the short-term counterpart.
But desirability comes with an element of exclusivity–long-term loans are tougher to qualify for than short-term loans.
Your business might not require the capital that you can obtain with a long-term loan. You might not be able to repay a large loan amount. Although interest rates for short-term loans are generally higher than those on long-term loans due to the longer time it takes to accrue, you will end up paying more interest on long-term loans. To calculate the true cost of your loan, whether short-term or long-term.
It is possible for funding to take a different time. A short-term loan from an internet lender may be the best option if you are in a hurry. SBA loans and long-term loans can take up to three weeks to reach your bank account. This is in contrast to how fast you might see funds from a short-term loan.
The best small business loan is one that helps your business grow. Your lender and you can decide if it’s a short-term or long-term loan. Looking for a lender let Progressive Business Capital explain the different types of business loans and merchant cash advances that may help you with your business financial situation.
Reach out to us to learn more about your loan options at (800) 508-4532 or via email at [email protected].