As a small business owner, it is likely you will need to seek financing to plan to invest in new equipment, new staff or invest in other areas of your business. Long term loans are best matched with growth investments in which you expect to receive a total payback or return in over one year. With long term loans, the loan is paid back in monthly payments over a term of one to ten years, whereas short term loans are issued for less than one year.
Deciding on a long term loan has its advantages such as lower interest and more time to repay, but you’ll need to be creditworthy with an established financial history. Short term loans offer a solution for immediate cash flow needs and may be a good option if you don’t qualify for long term financing.
While the funding amount you have in mind will help you pick a lender, it is important to consider the qualification process and loan characteristics for both options to ensure the new loan matches your business needs and profile. In this article, you’ll learn the differences between long and short term loans, and the best long term loans for your small business.
Short Term vs. Long Term Business Loans
The type of small business loan you obtain will differ in how much interest you pay and ultimately in the amount you pay over the life of the loan. Long term loans offer you the benefit of an extended repayment term, whereas short term business loans offer quick access to capital for immediate cash flow needs.
To explain the differences between long term and short term business loans, we’ve separated their characteristics into three categories: qualifying criteria, the best use for each one, and loan term and rates.
1. Qualifying Criteria
Lenders look for well-established business finances and strong personal credit when issuing long term loans. The application process can be extremely detailed, where the lender reviews several years of financial statements and tax returns. In other words, since your business will be repaying the loan over a long period of time, the criteria are more stringent.
Lenders judge whether the business is creditworthy based on numerous factors including business assets, projected expenses and capacity to repay debt. They are looking for how much cash you have at hand as well as other illiquid assets that can be accessed if the business doesn’t perform well enough to repay the debt.
Long term loans may require you to submit a business plan as part of the application process to evaluate future earnings. On the other hand, the short term loan process is more reliant on historic cash flow instead of having good credit and a positive outlook on future projections.
Short term business loans offer funding options with no minimum personal credit score. Applicants are still required to submit documentation, most commonly bank statements, to prove their ability to repay.
Lastly, lenders often require you to pledge collateral such as business assets (e.g. equipment, inventory) and personal assets (e.g. home, vehicle) to qualify for a long term loan. The collateral limits the downside for the lender because they are able to seize any pledged assets in case you default or can’t repay the loan (similar to a mortgage foreclosure). Short term loans typically do not require collateral, but since they don’t have the same downside protection these loans have higher rates than long term loans.
Businesses use long term financing for large investments such as expansion, construction, new equipment and other investments that exceed one year in profits. Long term loans are suitable for these uses because the payback of these investments takes more than 12 months. For instance, if a restaurateur wants to open a new store it will probably take 2 months to finalize the leasing agreement, 1-2 months to renovate the new location, and 3-9 months for the store to make a profit. For capital needs of expansion or development, this type of loan offers flexibility for established businesses. Because long-term loans are paid between 2 and 7 years, the restaurateur will have enough time to pay back the lender with minimal stress.
On the other hand, short term loans are ideal for small business owners who need to overcome anticipated cash flow fluctuations. For example, a short term loan will be suitable when you need quick cash to purchase inventory to fulfill a new client order and expect to receive a check from your clients within 30 days of delivering the finished goods.
3. Term and Rates
The obvious difference between short term and long term business loans is the length of time that the debt is outstanding. Short term loans are normally paid back between 3 and 12 months, while long term loans can span between 2 and 10 years.
With a long term loan, you will normally make monthly payments via electronic transfer or check, whereas short term loans need to be paid daily or weekly via an automated deduction from your bank or merchant services account.
In comparison with short term loans, long term business loans have lower interest rates. Short term loans have annual rates over 20% and many lenders charge a fixed financing fee called a factor rate (similar to payday loans).
Two Long Term Loan Alternatives for Small Businesses
1. SBA Loans
Small Business Administration (SBA) loans are backed by the government, making it easier to qualify for in comparison with traditional bank loans. Interest rates will be substantially lower than short term options, along with terms for repayment between 5 and 10 years. The amount you can obtain ranges from $5,000 to $5 million, giving you the flexibility to only borrow what you need.
Since the government backs the loans for participating lenders, they are able to offer affordable rates for small businesses that wouldn’t qualify for traditional bank loans. Currently, the maximum interest rates for SBA loans range from 7.25% to 9.75%, while non-SBA long term loans range from 7% to 30%.
Businesses that don’t qualify for a traditional bank loan benefit from this option as an alternative to higher interest rate short term loans. However, the application process is more lengthy as the business must provide documentation proving that they can repay the debt while continuing to cover other financial obligations. Most younger businesses are required to provide a copy of their business plan to prove that the operations are sustainable.
Lenders review SBA loan applications on a case-by-case basis, however, the following general criteria is typically required for an SBA loan:
- Collateral is mandatory
- Business must be in operation for two years or more
- $100,000 in annual revenue
- 680 or higher credit score
If you don’t meet the SBA requirements, don’t risk impacting your credit score and waiting through a long application process. While it is a great option for borrowers that don’t fit into traditional bank loans, SBA loans are not for everyone.
2. Camino Financial Small Business Loans
The criteria for the Camino Financial Small Business loans are much more flexible in comparison with traditional banks or SBA loans. Take a look at the following unique features which make Camino Financial the best solution for financing the growth of your small business:
- No collateral required
As opposed to traditional long term loans, the unique benefit of Camino Financial loans is they are unsecured: this means no collateral is required to secure your loan. Your personal assets can only be seized through a bankruptcy court, so this offers the applicant more protection.
- Fast and convenient
The mobile-friendly online process makes the application fast, easy and convenient. The time from approval to funding is between 2 to 10 days, which saves business owners from the lengthy application process associated with SBA loans or banks.
- Figures that make sense for small businesses
The Small Business Loan amounts range from $5,000 to $400,000. Their payment terms range from 24 to 60 months, and you can repay your whole debt at any time without penalty. The annual interest rates vary from 12.00% to 40%. If you want to take a look online at what a potential loan would look like before submitting a formal application, you can use their business loan calculator. It will allow you to see how your monthly payments would look like at different loan amounts and rates.
- Easy to qualify
The qualifying criteria are very reasonable. Both sole proprietors and ITIN holders are eligible to apply, which gives business owners the opportunity to create a thriving business even without a legal immigration status. You can pre-qualify instantly without impacting your credit score. Camino Financial customer service is available in both English and Spanish, providing you with helpful support in your language throughout the application process.
The only documentation you are required to provide is the following: electronic authorization to download the last 6 months of your business banking activity and proof of business registration. In some cases, you will be required to provide your tax returns to extend the term and lower the interest rate.
- No prepayment penalty
With almost no restrictions on how the funds are used, business owners have the flexibility to use the money for a wide range of expenses and growth opportunities. There are also no prepayment penalties or hidden costs, meaning that you don’t need to carry the loan to full term if you plan on paying it off faster.
- High security
With any loan application, it is important to verify that the lender is legitimate and will protect your sensitive information with a secure application. The electronic authorization to download your banking activity is completely safe. At Camino Financial, they value your security and ensure that you are protected every step of the way.
- Exclusive benefits
Camino Financial makes it simple to manage your money with a mobile-friendly member account to access and pay your loan. When you work with Camino Financial, you’ll feel like a member of the Camino Family with access to workshops and online webinars. You will also receive awesome benefits including business consultations and special discounts on products and services.
Remember: to get approved for a Camino Financial loan, you don’t need to pledge collateral. Your personal assets are a lot more protected!
As you can see, working with Camino Financial allows you to get the best features of a long term loan without the hassle associated with traditional banks. We know that applying for a business loan can be a scary process. However, we work hard to make this as easy and as transparent as possible. We strive to bring you the best financing solutions to help you achieve incredible success. But don’t take our word for it! We invite you to read our reviews on Facebook and our clients’ Success Stories.
Are you ready to take the first step to make your business grow? Just click HERE and complete a short mobile-friendly loan application. It will only take you a few minutes. No documentation is required and this will not impact your credit score. We want to work with you!