When you think of small business loans, the first thing that may come to mind are long-term, high-value loans from lenders like banks or the Canada Small Business Financing Program. While this type of traditional small business funding may be exactly what your business needs, many different types of small business funding exist, and long-term loans are not always the best choice.
For newer businesses that are seeking working capital, short-term asset-based funding is typically more practical. Long-term financing tends to come later, when a business has established a strong cash flow, a healthy financial history, and a good credit score.
If you aren’t sure whether you need a long- or short-term business loan, the first question to ask yourself is “why do I need a loan?”. Understanding the purpose for your loan is essential to selecting the right funding, from how much you need to borrow, what loan terms make the most sense, and what type of lender is best for you. Once you have a clear idea of why you need funding, you can consider the other factors that influence whether you need short- or long-term funding, including:
- The amount you need to borrow
- How quickly you need funding
- The type of lender you are working with
- Whether you have collateral to offer
- Your business’s overall financial health
In this post, we’ll explain the differences between long- and short-term funding to help you decide which option is best for your business.
Let’s get started.
At a Glance: Short Term Loans vs. Long Term Loans
|Short-term Business Loans||Long-term Business Loans|
|Loan Amount||Up to $500,000||Up to $2M|
|Loan Type||Multiple funding options are available, including merchant cash advances or invoice factoring||Typically term loans|
|Term Lengths||10-20 years||Typically 1 year or less, but can be up to 3 years|
|Fees||Typically use a factor rate, plus lender fees||Typically use a standard interest rate, plus lender fees|
|Application Process||Streamlined online application with funds deposited in as little as one business day||Can take weeks for banks to process, with significant financial documentation requirements|
|Qualifications||Flexible requirements with more focus on business potential than financial history||Strong personal credit and business financial history|
|Repayment||Depends on loan type||Typically a monthly payment that covers interest and principal|
|Ideal Uses||Ventures with immediate ROI, such as hiring staff, purchasing inventory, or purchasing equipment||Meeting long-term expansion needs, such as purchasing real estate or acquiring another business|
Short-term Small Business Funding
Short-term small business funding is designed to meet the more immediate needs of a business, including ventures where businesses can expect to see a return in the near future, such as purchasing equipment or hiring staff to keep up with additional demand.
Short-term loans tend to be for smaller amounts—up to $500,000—but they are typically easier to acquire with faster application turnaround than long-term loans—sometimes in as little as 24 hours—and they have flexible approval requirements that don’t require collateral. Rates are often higher, but it’s important to remember that terms are much shorter, so the cost of short-term funding is often lower than long-term funding over the lifetime of the loan.
Short-term small business loans are typically repaid over a span of months rather than years, but terms can be as long as three years (sometimes called a medium-term loan).
Types of short-term financing
Some banks and traditional lenders may offer short-term funding options, but most types of short-term financing are available from alternative lenders, including direct online lenders like Greenbox Capital®. Alternative lenders typically offer asset-based financing options that don’t require collateral, including:
- Merchant cash advances: Merchant cash advances are not technically loans—they are a form of asset-based financing known as a “purchase of future receivables”. You get working capital when you need it, and your lender receives a percentage of your daily or weekly credit card sales until the advance is repaid. Learn more about merchant cash advances.
- Invoice factoring: Invoice factoring is another non-loan form of financing known as accounts receivable financing. Instead of providing a business with a lump sum that will be repaid over a certain term, a business will essentially sell their unpaid invoices to a lender, called a “factor”. The factor then “owns” the invoice(s) and will advance the money that your clients already owe you, typically between 70-90% of the invoice’s value. The remainder of the invoice’s value will be paid out to you once your client pays, minus any lender fees. Learn more about invoice factoring.
- Alternative lines of credit: Alternative lenders offer business lines of credit that operate similarly to traditional lines of credit, but with different approval requirements.
Short-term small business funding rates
Short-term small business funding rates tend to be higher than long-term small business funding, but this does not mean your total loan cost will be higher—because terms are much shorter, loan costs have less time to accumulate and often end up lower than funding with 5 or 10+ year terms.
Many forms of short-term funding, including merchant cash advances, use a factor rate to determine fees instead of a traditional interest rate. Factor rates are simple decimal figures that show how much “extra” you will owe on the original amount of the loan. They are based on your risk assessment, so the stronger your business’s financial history, the lower your rate should be.
Alternative lenders, including direct online lenders, often have flexible approval requirements that are more favourable to businesses that may not qualify for long-term funding from a traditional lender, including younger businesses, businesses with lower credit scores, and businesses in “high-risk” industries.
Approval isn’t based on your credit score alone—instead, these lenders focus on the overall health and potential of your business. While your personal and business credit score will be factored into your application, these lenders will consider it alongside criteria such as:
- Business revenue
- Cash flow
- Vendor payment history
- Years in business
- Public records
When to use short-term small business funding
Short-term small business funding is best used for investing in opportunities that have a more immediate return on investment, such as:
- Project start up costs
- Bridging seasonal cash flow gaps
- Purchasing inventory in bulk for a discount
- Covering costs of emergency repairs or other unexpected expenses
- Hiring new employees
- Purchasing equipment
- General working capital
Who should apply for short-term small business funding?
- Businesses who need fast funding
- Businesses who need smaller funding amounts
- Younger businesses
- Businesses with lower credit scores
- Businesses with no collateral
Long-term Small Business Funding
Long-term small business funding is designed to meet the longer term financial needs of a business, such as expanding, acquiring another business, purchasing real estate, or other ventures that aren’t expected to generate an immediate profit.
Long-term small business loans tend to be granted for higher amounts—sometimes up to $2M, depending on the lender. Rates tend to be lower and monthly payments tend to be smaller than short-term funding. Smaller monthly payments may be beneficial for managing your cash flow, but approval requirements for this type of funding are often much stricter, and collateral or a down payment is often required.
Long-term business funding is typically repaid over several years, with term lengths sometimes as long as 10-20 years.
Types of long-term funding
Long-term small business loans are offered by traditional commercial banks and the Canada Small Business Financing Program.
There are two main types of long-term funding:
- Term loans: Term loans are the most common type of long-term business funding. With a term loan, business owners are given a lump sum of money that is paid off in set monthly installments, plus interest and fees, over a predetermined period of time.
- Business line of credit: Business lines of credit are also available for longer term periods. Businesses can draw from and repay the line as needed, and will only ever pay interest on the amount borrowed.
Long-term small business funding rates
Long-term small business loans typically use a standard interest rate. The rate is often lower than short-term funding options, but that doesn’t necessarily mean the loan will be cheaper—since term lengths are typically much longer, you may end up paying significantly more over the lifespan of the loan.
Long-term business loans are typically only approved for wealthy businesses with strong financial histories, exceptionally high credit scores, and collateral.
When to use long-term small business funding
Long-term small business loans are best used for investing in longer-term ventures that may not have an immediate return on investment, such as:
- Purchasing real estate
- Acquiring another business
- Building or renovating facilities
- Product development
Who should apply for long-term small business funding?
- Established businesses with strong credit and financial histories
- Larger loan amounts
Get the short-term funding that’s right for you
Short-term funding offered by alternative lenders offers a number of advantages over financing options offered by traditional lending institutions, including a simplified application, faster processing and approvals, and unique financing options that suit the needs of your business.
Many types of short-term alternative funding are available to businesses who need funding quickly, don’t meet the strict criteria of government funding programs and other traditional lenders, or would prefer not to seek funding from friends or family members. With funding from as little as $3,000 up to $500,000, business owners can access alternative funding that suits their unique needs, including merchant cash advances, online invoice factoring, and business lines of credit.