Short VS Long Term Loans
The term loan is not a strange word in business. As an entrepreneur, one way or the other you must have found yourself on the crossroads of wanting a loan of some kind, be it long or short term. Basically the word loan is money given which will be returned along with interest. The money lent is a debt, traditionally gotten from commercial banks in the form of term loans. Those term loans may have short, intermediate, or long maturities. The different lengths of maturities signify not time alone (the time frame of payment), but also purposes for the loans. Before taking out any term loan, ask yourself these vital questions:
Do you really need a loan? If yes, how much do you really need?
What loan term to you want; long or short?
Do you actually need it in cash?
Small businesses most often need short-term loans instead of long-term debt financing, and vice versa. Long-term loans are one way of financing major purchases or consolidating several short-term loans into a single longer-term loan, while Short term loans are designed for shorter repayment duration and therefore the debtor is not bound by long term obligation. If you have an opportunity to cover you loan debt in a short period you may require short term loans. Most lenders generally prefer to offer you a loan payable over three or more years as they can make more money out of it over a longer time frame. Short term loans may be provided for purposes uh as; education, home upgrades or improvement, repairs of any form of wear and tear, clearing of small debts, etc.
Short-term loans are helpful to businesses that are seasonal in nature such as retail businesses. Obtaining a long term loan provides a business with working capital that it can use to purchase assets, inventory or equipment which can be used to create additional income for business. Common examples of long-term loans used by consumers are mortgages, car loans, equity loans and some personal loans.
Loans are basically aids; each of the terms has its merits and demerits, listed below are but a few:
Merits of long term loans
Long-term bank loans normally have lower interest rates than short-term loans. With long term loans, borrowers can take a longer period of time to start paying off their loan. Long-term loans allow you to buy things paying for them over time that you otherwise couldn’t afford. The loan and interest usually are repaid over 20 to 30 years. This debt type allows you to work with the lender to figure out how much you can afford to pay back each month over the loan term.
Demerits of long term loans
A longer time frame is involved, making you indebted for a very long time. The longer your repayment term, the more you end up paying in total interest costs. You pay nearly twice as much for the product, e.g. your home, to be able to afford to purchase it through a long-term loan. Getting wrapped up in long-term debt obligations also restricts your monthly cash flow. This makes it difficult to cumulate a tangible fund for business.
Short-term loan rates are usually based on the prime interest rate plus some premium
Merits of short term loans:
Short term loans do not necessarily require collateral as a prerequisite. In terms of application short term loans are quicker, which makes fund available within a day or few days. Little paper work is involved in obtaining such loans. In terms of immediate need for cash, short term loans provide you with money as soon as the need arises. With short term loans you do not burden yourself with long term obligations.
Demerits of short term loans:
Lenders take advantage of such avenue, since it’s not secured by collateral the interest rates are higher to cover the risk they bear in the short term. Before giving you short term loans the lender is likely to investigate into your credit history and if it is excellent you will be offered short term loans with lower interest rates. Short term loans are usually more expensive. Compare to long term loans their interest rates are higher. In some cases some additional charges are imposed such as transfer fees.
From a rational point of view, the availability of short-term loans to small businesses in our economy is absolutely indispensable for smooth economic operation. Without short-term financing, small businesses literally cannot operate and vice versa.
