We know it’s tricky to navigate through the murky financial waters of owning a small business. That’s why we like to tackle tough topics, like the difference between a merchant cash advance and a loan. So sit back and grab a cup of coffee. We’ll do all of the heavy lifting.
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When your business is in need of capital, your next thought may lead you to a bank loan, and rightfully so. Traditional banks have practiced the art of lending for centuries and have helped build our country. Whether you want to buy land, build a house or start a business, if you need capital, you go to a bank.
You apply for a business loan, provide the necessary requirements, and if approved, the bank gives you a lump sum of cash in exchange for making monthly payments over a set period of time, or ‘term’, with a fixed or variable interest rate over the life of the loan. Depending on the term of the business loan, it would then be further sub-categorized as either a long-term or short-term loan.
Long-term loans are, you guessed it, loans with a repayment period significantly longer than what’s considered a short-term business loan. Repayment for a long-term business loan can be anywhere from five years to a decade or more.
Approvals for long-term loans are harder to come by because you have to contend with the strict qualifying standards of traditional banks. Most likely, you will also have to put up collateral and the bank ount of loans the business can take on in the future. Also, not only does your business have to be in good standing and have the financial statements to prove it, but your personal credit score will also have to be outstanding.
Long-term loans make more sense for established businesses with a stable business credit history that are looking to expand or acquire another company. In addition to the longer repayment term, these loans are generally higher dollar amounts (six figures is common) and can have a lower interest rate than short-term loans. The Small Business Administration (SBA) is a great source for low-interest loans with varying terms for established businesses, and they are partially backed by the government. So, if you default on the loan, the federal government is responsible for paying back 85 percent of it.
However, borrowers beware, the lower interest rate over a longer period of time can equal or surpass that of a short-term business loan over its lifespan, significantly increasing the repayment amount. Just do the math.
As a small business owner, you’ll typically go with a short-term loan, even if you’re just starting out. A short-term loan is structured to provide more immediate funds. Short-term loans are typically smaller amounts, have a slightly higher interest rate than long-term loans, and you guessed it, have a shorter payback period that can last a few months to a few years.
Short-term loans heavily rely on your personal credit and may require you to put up collateral if you’re going through a traditional financial institution such as a bank. However, on the bright side, there are more alternative financing sources for small business owners other than banks, but more on that later. That makes them easier to obtain even if you don’t have the best personal credit score or collateral to put against the loan.