Which loan is right for you?

Short term or long term loans: Which one is right for you?

Throughout the course of running a business owners are faced with difficult decisions and constant challenges. Among those are decisions relating to cash flow management, and more specifically, business finance. When assessing business loan options, it is important to consider several factors including the size, purpose, and source of the loan.

With the above and key financial figures such as cash flow in mind, a determination must be made between a short term loan or long term loan. On the surface it may seem as though there is little between the two, but in many circumstances the benefits and shortcomings vary. We explore the pros and cons of both to help you recognise which one is right for you.

What are long term business loans?

When people think of long term loans the first thing that comes to mind is home loans. Traditionally offered by bank lenders, these loans are paid over an extended period stretching up to 30 years. Although long term small business loans can stretch over a similar period, business finance with loan terms beyond 12 months is considered long term.

There are many characteristics of long term business loans which makes them easy to identify. They involve a significant sum of money being borrowed and repaid with interest at regular intervals. Long term business loans are usually secured loans with a larger loan size attached to them.

Long term loans are often utilised for the purchase of fixed assets such as property, plant and equipment. Other reasons include to expand operations, invest in growth opportunities, make large inventory purchases or to acquire another business. Simply Funds offers the following long term loans:

Second Mortgages: Are a useful form of business finance provided by online lenders and other financial institutions. They allow business owners to access any equity in a personal home that already has a mortgage. A loan to value ratio of up to 70% and interest only repayments are among key benefits provided.

Development Loans: Business finance for the construction of multiple properties/dwellings on one title. Key features include staged payments and interest capitalisation.

Secured Business Loans: Businesses can use a wide range of assets as security. These include real estate, other property, inventory and invoices. The presence of collateral means that borrowers are able to access substantial business finance with lower interest rates.

The pros and cons of long-term small business loans

It is useful to weigh up the pros and cons before deciding to apply for business finance. Here is a look at some of the pros and cons of long term business loans. These should be used as a guide and may vary across different loan products.

Pros

  • Fast approval
  • Quick settlement
  • 1 year - 30 year loan terms
  • Higher loan amount
  • Lower interest rates
  • Utilise equity in existing property
  • Can use a variety of assets as security

Cons

  • Usually require collateral
  • Additional documentation
  • Not for start-ups
  • Require good credit rating
  • Longer time to become debt-free

What are short term business loans

As indicated by their name, short term business loans are characterised by a shorter repayment period than other loans. Many loan products offer extended repayments, but the bulk of short term business loans are paid off between 1 month and 12 months. They are often referred to as fast business loans due to a streamlined application process and funding in less than 48 hours.

One of the key differences between long term business loans and short term business loans is the presence of collateral. Short term business loans can be both secured and unsecured. They also offer a more flexible lending criteria and can be accessed by applicants with a low credit score. This form of finance is often used by businesses to bridge the gap at times where there is a cash flow deficit.

In addition to dealing with financial distress, short term business loans can be used to increase business operations or capitalise on new opportunities. Common short term business loan types include:

Start-Up Loans: Ideal for businesses in their infancy who are unable to access business finance from a bank lender. In many circumstances, there is no need to have recorded cash flow or capital.

Bad Credit Business Loans: Suitable for applicants with a low credit score or previous defaults. Limited documentation required and no collateral.

Caveat Loans: Finance is obtained and secured by a piece of real estate with a caveat lodged on the title of the ownership to prevent the owner from selling, transferring, or dealing with the property without the consent of the caveator (lender).

The pros and cons of short-term business loans

Short term business loans offer a range of advantages including a fast approval process and business finance options for applicants with a bad credit history. Online lenders specialise in short term business loans and have flexible lending criteria when compared to bank lenders. Weigh up the pros and cons listed below to determine the most suitable option for your financial needs.

Pros

  • Fast approval
  • Funding in less than 48 hours
  • Low doc application
  • Bad credit accepted
  • Ideal for start-ups
  • Business finance without collateral
  • Flexible lending criteria

Cons

  • Higher interest rate
  • Lower loan amount
  • Higher repayments could impact cash flow

If you are still having trouble deciding between a long term loan or short term loan, contact us today and speak to one of our lending specialists. They will assess your financial position before recommending the most suitable loan product for your needs.

Simply Funds latest articles

Check if you qualify for a Simply Funds business loan today

We’ll assess your application fast and get you an answer (and the funds you need) quickly. Simply select the amount you're looking to borrow, click on the button below and fill out the form. Our friendly team will respond to your enquiry as soon as possible.

How much do you want to borrow?

Can you borrow through a company *

* = required field