There are several challenges business owners face when running a small business. Although it can be rewarding, it can be a struggle as well especially when it comes to cash flow. Poor cash flow is one of the reasons businesses end up failing because business owners do not manage their finances effectively. In fact, 82% of small businesses in the United States fail because of poor cash flow management.
When businesses face cash flow problems, short-term and traditional term financing can be helpful. Before applying for a loan, it is important to first know which type of loan aligns with your business goals. In this article we will discuss the difference between these two popular types of loans so you can determine which one is right for you.
Traditional term business loans have a repayment schedule lasting several years. Short term financing allows owners to pay back the loan in a shorter time period which ranges from months to a few years. Short term business loans are more favorable to small business owners because they provide capital faster than traditional term business loans and you do not have to take large long-term debt.
How to Decide Between Loans
Some factors to consider when deciding to invest in short-term or traditional term business loans are how fast you need the funds, the amount of the loan you will need, and the type of lender you want to use.
If you are looking to get funding quickly, short-term loans are the best option since you will often get the funds you need in as little as one day. This type of loan is also easy to apply and qualify for. Traditional term loans have a longer process for approval and are more difficult to obtain. Lenders want to know that you are reliable and will be able to pay the loan back.
If your business needs a small amount of funds to pay for any immediate expenses, short-term business loans work better for that. If you need a larger amount, traditional terms better suite you. Interest rates for traditional term loans have lower interest rates unlike short-term loans who have higher ones. Short-term loans are easier to pay back and get out of debt faster. Rates for short-term loans are based on the prime interest rate plus some premium. The premium is determined by the bank or lender by looking what kind of risk your company is to them. Be sure you are knowledgeable about the prime interest rate so you can negotiate the interest rate on your short-term loan.
Traditional term business loans are great for businesses who are looking for business acquisition or future expansion that will take place over several years. Repayment terms typically last as long as 10 or 20 years. Collateral may be required this type of business loan where short-term does not require collateral.
Cons of Short-Term and Traditional Term Business Loans
A primary disadvantage of short-term financing is that you may not able to secure a large amount of capital, so your best bet is going to a traditional bank. Short-term loans also have a cap on the loan amount which is $500,000.
Traditional term business loans often have strict financial requirements. You will need to have a lot of cash flow already to qualify. Also, the terms are based on what the bank says which leave you with little choice and flexibility. Lastly, collateral will be required to secure the loan since it is risky for the lender to lend a large amount of money.
Types of Term Loan Lenders
For traditional term business loans, traditional banks are the most popular. Detailed applications and detailed financial information will be needed to fill out an application. Some banks might require the borrower to present a business plan to make sure they are lending to the right person.
For short-term business loans, there are a variety of options available such as traditional banks and online alternative lenders. Throughout the years there has been an increase in the number of loans offered by online small business lenders. This only shows that there are many small businesses who are seeking fast access to working capital.
Which is Best?
The best type of loan for your business depends on several factors but the two main ones to start with are how quickly you need the money and how fast you can pay it back. If you need money for working capital and have enough revenue to repay the loan in a short-term, a short-term loan is a great choice. If your business is relatively new and you only can make low monthly payments, a long-term loan is a better choice. No matter which option you decide, it is important to work with a qualified lender who understands the needs of your business.