The biggest difference between short-term and long-term working capital loans is the repayment term. The best loan for your small business depends on your income stream, what you intend to use it for, and when you expect you would be able to pay back the loan in full.
Short-Term Working Capital Loans
Short-term loans are usually utilized by small business owners to fund one of the following:
- Emergency repairs of equipment
- Purchases of discounted inventory
- Project start-up costs
- Cash flow gaps between seasons
This type of loan is best utilized when you expect to see an immediate return on your investment. Many small business owners won’t proceed with a loan unless they can see a return as high as five to one.
The application process is fast, and usually, the borrower has his or her money in 24 to 48 hours.
Interest rates may be higher than long-term loans, but long-term borrowers could pay more in interest because of the longer loan term.
Short-term working capital loans are also good for avoiding high credit card debt. You get the financial agility to cover either temporary or emergency expenses without racking up open-ended revolving debt.
The payback terms require a quick turnaround and are usually within a year or less. If the payback term is before you expect to see a return on your investment, a short-term loan may not be for you.
Long-Term Working Capital Loans
A long-term loan offers multi-year repayment terms and can allow a company to think more strategically about where it spends its time and money.
There are a lot of advantages to taking out a long-term working capital loan, some of which include:
- The business will be less influenced by seasonal discrepancies in sales
- You will be in a better position to jump on opportunities when they arise
- Ability to fulfill larger contracts with customers
- Ability to take advantage of early payment discounts with suppliers
Long-term working capital loans may be more difficult to get approved for because lenders require stricter qualifications. They typically want to see that the business is a few years old and that it has a strong credit profile as well as strong revenues.
Lastly, because the loan terms are longer, borrowers could pay more in interest over the life of the loan.
What Works Best for your Company?
Have you been in business for a while, or are you just starting out? Do you need the money to fulfill a contract, or are you strategizing for the coming years ahead? Think about your working capital needs and determine the best timeline for repayment.