Every business, whether small-scale or a large organization, requires money to finance its operations, such as expansion, buying inventory, upgrading machines, paying salaries to staff, and more. To help new and old entrepreneurs, non-banking financial institutions offer various avenues like loans and business credit cards, which are tailored to meet specific business needs.
In today's dynamic business environment, obtaining a large and small business loan in India is a viable option for people to begin their entrepreneurial journey. Business loans are classified as – short-term and long-term business loans. Each has its pros and cons, and what type you choose depends on your financing needs.
So let us dive in and see the differences between these two loans that can assist you in making the right decision about which works best for your business.
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As the name suggests, short-term business loans are targeted towards business owners looking to raise funds for a short duration, usually less than a year. It provides you with immediate funding in case your business is revamping or wants to take advantage of a new business opportunity. Other uses for which you can avail this loan includes – paying employees, purchasing inventory, or maintaining seasonal cash flow.
Long-term business loans, on the other hand, are high-value loans that come with longer duration of five to ten years or more. These credits are acquired for expansion of business operations, upgrading technology, buying machinery, etc.
To know which loan is the best fit for your business, you need to know the difference between the two. Besides the tenure, long-term and short-term loans also vary according to their eligibility requirements, loan purpose, need for collateral, and interest rates. The following are some pointers you should know before applying for the particular business loan.
1. Repayment tenure – A short-term loan is scheduled for repayment within 3 months to 18 months. Usually, it is within one year. In the case of long-term loans, the repayment period can vary between 5 to 10 years or more. Before you go for the loan, check your monthly installments through a business loan calculator, so that you can plan your repayments with ease.
2. Need for collateral - Short-term business loans are unsecured as they availed only for a short tenure. On the other hand, since long-term loans provide a significant amount to the borrowers, there is a need to pledge security with the lender.
3. Disbursal time – Short-term loans are disbursed must faster than long-term loans. While short-term loans can be approved within a few hours, long-term loans can take a few days or even a week. This is because all the necessary documents are to be submitted along with the background check by the lender.
4. Documentation – Availing a short-term loan is a hassle-free process as it requires minimal documentation due to lack of scrutiny. However, in case of long-term credits, multiple documents are needed, such as copies of bank statements, IT returns, cash flow statements, certificates of business existence, etc.
Both short-term and long-term loans have their own advantages and disadvantages. The ultimate decision entirely depends on the specific needs of your business. Long-term loans are considered more alluring than short-term loans due to the high loan amount, lower interest rates, and the longer repayment period. However, it isn't easy to qualify for the long-term loan as compared to its short-term counterpart.
Regardless of the kind of loan you secure, it is essential to choose a lender who understands the requirements and challenges of your business. Also, plan how you are going to repay your loan prudently to avoid unnecessary expenses in the future.
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