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If you’ve decided to start your own business and looking for finances, then a business loan is here for your rescue. A business loan is a form of financial assistance offered by banks and NBFCs in India to help business owners avail steady growth. With a business loan, individuals can easily take care of inventory, equipment, machinery, office space, or any other essential needs. Banks and NBFCs generally provide business loan apply online facilities, assuring seamless transactions. There are a variety of business loans available in the market like a term loan, start-up loan, working capital loan etc. That can be personalized as per types and needs.
Business loans can mainly be classified into two different categories: long-term business loans and short-term business loans. They both are capable of catering to the different financial needs of a particular business. It is always advisable to conduct thorough research before opting for any kind of loan. Find out the difference between the two and decide what aligns with your business objectives the best.
Short-term business loans
It’s clear from the name itself that it’s a business loan for a short tenure. Most businesses go for a short-term loan, especially if they’re just getting off the ground. With a short-term loan, it’s easier to get instant liquidity, unlike a long-term loan. It’s also easier to pay back short-term loans since the amount is lower. Generally, businesses avail short-term loans to finance their working capital, liquidity or to overcome short-term financial setbacks, etc. These loans are generally for the operational needs, have floating interest rates, and a shorter maturity period. Since the amount is low, the associated risk is less for the bank and therefore, minimal documentation is required. These loans are a great option for small business owners or start-ups as they may not be eligible for large loan amounts.
Long-term business loans
The tenure for a long-term business loan ranges between 5-10 years and features a larger loan amount. It’s used for business objectives beyond operational needs. With a long-term business loan, management can make significant investments, such as extending their existing territory, opting for long-term initiatives, or upgrading infrastructure. Since it’s riskier, owners might have to pledge collateral to get a loan. Long-term loan approval is quite complicated and requires a longer time period with more documentation for banks to assess the associated risks. The interest rate for these loans is fixed and relatively lower than short-term business loans. With these loans, there’s room to breathe in an aspect of repayment. As steady revenues start coming in, owners can pay smaller interest for an extended period.
Long-term vs. Short-term business loans
As mentioned above, long-term and short-term business loans both cater to differential business objectives and have their own sets of benefits. Long-term loans are generally much riskier for the lender than short-term business loans because a massive amount of money gets tied with the borrower for a longer period. However, long-term business loans cost more to the borrower than short term despite a lower interest rate. This is because the borrower is repaying the loan for a longer tenure and hence the interest accumulated on the whole is more. Long-term business loans are sometimes necessary for the long-term growth of businesses, while short-term loans are necessary to keep running the overall business smoothly.
What’s best for you?
There are a variety of factors that must be thoroughly reconsidered before deciding the best one:
- Repayment capacity: With a short-term loan, the monthly payment amount is more in comparison to the long-term business loan, where the monthly payment amount is less. Businesses with a steady revenue find it easy to repay a short-term loan in a hassle-free manner. A long-term business loan is a safe option for startups, as the owner needs to pay a minimalistic monthly payment as per their capability. However, the charged interest rate is quite a hefty one.
- Business objective: Both the loans have their own sets of pros and cons. If a business needs immediate funds then a short-term business loan is a better option, but for sizeable long-term investments, a long-term business loan is a better option.
- Cash flow needs: You must consider realistic projections about your business’s cash flow needs for now and in near future. Timing is essential, as you need to have enough money to repay by the due date and also meet other requirements.
- Risk: Risk tolerance level is a significant factor that must be brought under consideration. However, the respective risk with both types depends on the context. A long-term business loan may seem riskier due to longer repayment obligations, but at times short-term loans can be riskier due to larger repayment amounts attached to them within a short tenure.
At one point or other, a business loan can benefit any business. A thorough analysis of the factors can help you with deciding what’s best.
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