However successful your small or mid-market business may be, there will come a point when your business requires additional capital to expand. This will lead you to consider various business financing options, including short-term and long-term loans. While assessing the pros and cons of both, it is imperative that management consider what is best for the business, with regard to both timing and cash flow.
What are short-term business loans?
Short-term business loans are loans, which come with a repayment time period of one year, although some short-term business loans can last up to three years or longer.Short-term business loans can be used to help mid sized companies increase inventory orders, payrolls and daily supplies.
There are several types of short-term business loans available. They include,
- Overdrafts (an extended credit granted by a financial institution)
- Letters of credit (a guarantee of payment to a seller)
- Short-term loans(a loan that has to be repaid with interest within a time period of less than a year or as specified by the bank)
Advantages and disadvantages of short-term business loans
Short-term business loans come with several advantages and relatively few disadvantages. They are a great source to gain quick cash flow and can help overcome small economic setbacks. It also allows small and medium sized business owners to capitalise on an opportunity, by providing the much-needed cash. The main disadvantage of a short-term business loan is the higher interest rates and the need for full collateral. Moreover, it does not help with long-term capital investment needs.
What are long-term business loans?
Any debt obligation with a loan term that is greater than one year can be termed as a long-term business loan. Small and mid-sized businesses generally go for long-term business loans for acquiring new equipment, R&D and company expansion.Major sources of long-term business loans include,
- Term Loans – (long term loans provided by banks amortized over a 3 to 5 year time period)
- Mezzanine loans (a hybrid of debt and equity financing that allows owners to retain major control of the business)
- Corporate bonds (a bond issued by a corporation to raise money effectively so as to expand its business)
Advantages and disadvantages of long-term business loans
Long-term business loans provide more financial stability as the principal is repaid over a longer time period. Furthermore, long-term business loans promote a company’s capacity for growth, which cannot be accomplished with a short-term loan. The main disadvantage is the difficulty in obtaining such financing. Moreover, new companies and start-ups, which have yet to establish a track record and build up assets, will have to present a clear plan to obtain long-term financing.
We at Attract Capital are an international financial advisory firm with a 25-year knowledge base of the private capital markets. Our proven process and large lender platform can help your company gain quick sourcing solutions for your various financing needs.
Please call us. Our expert financial advisors will be happy to discuss and point you towards the right business loan suitable for your company.