Comparing Short-term Business Loans vs. Long-term Loans

Traditionally, long-term small business funding from lenders like banks and the Canada Small Business Financing Program (CSBFP) has been the go-to option for small businesses seeking funding in Canada. But are long-term loans always the best option for your small business? Sometimes, short-term small business financing can make more sense, depending on your financial history, how much you are looking to borrow, and how you plan to use your funding.

Long-term loans tend to be better suited to businesses that have established good credit, a strong financial history, and a solid cash flow. On the other hand, a short-term loan may be a more practical choice for new businesses in need of fast working capital or who may not meet the strict requirements of traditional lenders.

Do you know which option is best for your business? Ultimately, it will depend on several factors, such as:

  • The reason you need a loan
  • How much you need to borrow
  • How quickly you need the money
  • How much collateral you have (if any)
  • The age and financial health of your business

Once you know the answers to these questions, you can decide which type of lender and what loan terms (short or long) are the most practical for your business.

Today, we’ll talk about short-term loans vs long-term loans to help you choose the best option for your small business. Let’s get started.

At a Glance: Short Term Loans vs. Long Term Loans


Short-term Business Loans Long-term Business Loans
Maximum Loan Amount $500,000 $2M
Loan Type Multiple funding options are available,
such as merchant cash advances and
invoice factoring
Term loans
Term Lengths 10-20 years 1-3 years
Fees Factor rate plus lender fees Standard interest rate plus lender fees
Application Process Streamlined online application Significant financial
documentation requirements
Deposit Timelines Funds available in as little as 1 business day May take several weeks
for the funds to
reach your account
Qualifications Flexible requirements with greater focus on
business potential than financial history
Strong personal credit and
business financial history
Repayment Various options dependent on loan type 1 monthly payment covering interest
and principal of loan
Ideal Uses Ventures with immediate ROI, such as hiring staff,
stocking inventory, or purchasing equipment
Long-term expansion plans,
such as purchasing real estate
or acquiring another business

The information in the table above is based on “typical” scenarios. Speak with your lender for specific details about your small business loan.

Short-term Business Loans


Short-term business loans are available from direct online lenders and are often used to meet immediate needs that are likely to show a quick return on investment, such as purchasing new equipment or hiring additional staff.

Short-term loans are best when you need to borrow a smaller amount—usually less than $500,000—and they’re often easier and quicker to get than long-term loans. Typically with a simple online application and little to no collateral requirements, you may have access to funds in as little as 24 hours. Although the rates on a short-term loan are often higher, the repayment plan is faster, making short-term business loans more cost-effective than long-term loans.

Repayment terms


Short-term business loans are typically repaid over a span of months rather than years. Sometimes, however, repayment terms can stretch as long as three years. In those cases, they’re often referred to as medium-term loans.

Types of short-term financing


While banks and traditional lenders may offer short-term loans, they’re most often borrowed from alternative lenders like Greenbox Capital®. Alternative lenders typically offer multiple types of short-term asset-based financing options that do not require collateral, such as:

Merchant cash advances

Technically, merchant cash advances aren’t loans, but rather a form of asset-based financing known as a “purchase of future receivables.” Merchant cash advances give you working capital when you need it, while the lender receives a percentage of your daily (or weekly) credit card sales until the advance is repaid.

Alternative lines of credit

Alternative lenders offer business lines of credit that operate much like traditional lines of credit, but with different approval requirements. Talk to your alternative lender for more information.

Invoice factoring

Also known as accounts receivable financing, invoice factoring is technically not a loan either. Rather than getting cash that will be repaid over a specific term, a business will essentially sell their unpaid invoices to a lender, called a “factor.” The factor then “owns” the invoice(s) and advances an average of 70-90% of the outstanding invoice’s value to the business. The remaining 10-30% (less lender fees) is released when the invoice is paid by your client.

Short-term small business loan rates


Short-term funding rates tend to be higher than long-term loans, but that doesn’t necessarily mean the cost of your loan will be higher. Since the terms are shorter, the cost of the loan has less time to accumulate. Short-term business loans often cost less than a 5- to 10-year term.

Rather than a traditional interest rate, many short-term business loans (including merchant cash advances) use a factor rate, which is based on your risk assessment. The stronger your business’s financial history, the lower your rate should be.

Qualification requirements


Younger businesses, those with lower credit scores, or businesses in high-risk industries may not qualify for a loan from traditional lenders. Fortunately, alternative lenders typically offer flexible approval requirements that make it easier for these types of businesses to secure funding.

Approval from an alternative lender is based not only on credit score, but on the current health and future potential of your business. They also take into consideration:

  • Revenue
  • Cash flow
  • Vendor payment history
  • Years in business
  • Public records

When to use a short-term loan vs long-term loan


Short-term business loans are most often used for investing in opportunities with a quick ROI, such as:

  • Bridging seasonal cash flow gaps
  • Purchasing inventory
  • Emergency repairs
  • Hiring staff
  • Boosting marketing and advertising
  • Purchasing new technology or software

Long-term business loans, on the other hand, are better suited to long-term investments, such as real estate, manufacturing equipment, or business expansion.

Advantages and disadvantages of short-term business loans


Like all forms of business funding, short-term business loans come with pros and cons.

Advantages

  • Fast turnaround—some lenders deposit funds in as little as 24 hours
  • Low overall fees due to shorter repayment terms
  • Flexible approval requirements
  • No collateral requirements
  • Often no restriction on how funds can be used

Disadvantages

  • Smaller loan amounts
  • Higher rates

Who should apply for short-term small business funding?


If your business (and its financial needs) fall into any of these categories, you should consider short-term funding:

  • You need fast funding
  • You’re looking for a smaller funding amount
  • Your business is new, or young
  • You have a lower personal or business credit score
  • You have no collateral

Long-term Small Business Funding


Long-term small business loans are available to help small businesses meet long-term financial needs, such as expansion, acquisitions and mergers, or real estate investments. Any venture that isn’t expected to generate immediate profit may be suited to a long-term loan.

Long-term funding is typically offered by traditional lenders, often for higher amounts—sometimes up to $2M—and the interest rates tend to be lower than short-term funding. Smaller monthly payments make it easier to manage cash flow, however, approval requirements are often more strict.

Let’s take a closer look at long-term business loans.

Repayment terms


Long-term business loans are usually repaid over several years. Term lengths can be 10-20 years or more depending on your lender, how much you borrow, and the purpose of the funding.

Types of long-term funding


Long-term small business loans are provided by traditional banks and federal funding programs like the CSBFP. There are typically two primary types of long-term funding options:

Term Loans

Term loans, the most common type of long-term business funding, provide your business with a sum of money that is repaid in monthly installments (plus interest and fees) over a set period of time.

Business Lines of Credit

Business lines of credit are also given for long-term periods. A business line of credit allows you to draw from and repay funds as needed, and you only pay interest on the amount borrowed, not the amount available.

Long-term small business funding rates


Long-term loan rates are typically based on a standard interest rate and tend to be lower than short-term loans. Lower interest rates don’t necessarily equal lower overall cost of a loan—longer terms mean you will likely pay more over the duration of the loan.

Qualification requirements


Documentation requirements for long-term business loans are typically much stricter, usually requiring up to 3 years of personal and business financial paperwork. In terms of approval requirements, long-term loans are usually only given to businesses with strong financial histories, high credit scores, and plenty of collateral.

When to use a long-term loan


Long-term business loans are most often used to fund longer-term ventures with a slower return on investment, such as:

  • Purchasing real estate
  • Acquiring another business
  • Building or renovating facilities
  • Product development

Advantages and disadvantages of long-term small business loans


Just like short-term loans, long-term small business loans have pros and cons. The advantages of a long-term loan include:

Advantages

  • Higher loan amounts
  • Lower rates

Disadvantages

  • Strict approval requirements
  • Down payment may be required
  • Collateral is required
  • Less flexibility on rates and funding options
  • Longer repayment terms
  • May be restrictions on how funds can be used

Who should apply for long-term small business funding?


Long-term loans are best suited to established businesses with strong credit and financial histories, and for those needing a larger loan amount for ventures expected to generate ROI over the long term.

Is a Short- or Long-term Loan Right for your Business?


If you’re searching for small business funding to fuel your growth or manage unexpected expenses, you have two options: a short term loan vs a long term loan. Short-term small business loans from alternative lenders offer several advantages compared to long-term loans given by traditional banks and the CSBFP, including easy applications, quick turnarounds and less strict approval criteria.

With loan amounts as little as $3,000 and as high as $500,000, business owners can choose the right alternative funding option to suit their needs, such as merchant cash advances, online invoice factoring, or business lines of credit.

If your business is well established, has a strong financial history and collateral, and if you’re looking for a larger loan amount (up to $2M) for expansion or major investments, long-term funding from traditional lenders-–like major banks or CSBFP—may be more in line with your needs.

How useful was this post?

Click on a star to rate it!

Average rating 0 / 5. Vote count: 0

No votes so far! Be the first to rate this post.

We are sorry that this post was not useful for you!

Let us improve this post!

Tell us how we can improve this post?

Smarter Loans Staff

The Smarter Loans Staff is made up of writers, researchers, journalists, business leaders and industry experts who carefully research, analyze and produce Canada's highest quality content when it comes to money matters, on behalf of Smarter Loans. While we cannot possibly name every person involved in the process, we collectively credit them as Smarter Loans Writing Staff. Our work has been featured in the Toronto Star, National Post and many other publications. Today, Smarter Loans is recognized in Canada as the go-to destination for financial education, and was named the "GPS of Fintech Lending" by the Toronto Star in 2019.

Categories