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The type of business loan – short-term or long-term – is another important consideration, as it impacts the repayment period and often other aspects of the loan terms. Learning more about long-term and short-term business loans could help you make an informed decision on which type of funding is right for you.
What Is a Long-Term Business Loan?
Long-term business loans are a type of funding option provided by traditional lenders. They’re intended to meet more long-term financing needs, such as business acquisition or future expansion over a number of years.
This type of financing often involves repayment terms that may last up to 10 or 20 years. These loan types often include additional requirements, like collateral or limits on the amount of additional funding a business can take on later.
Pros and cons of long-term business loans
These loans can be a good option for small businesses that have large, long-term funding needs. Business owners who are willing to make a substantial down payment may be able to reduce loan costs.
However, this type of loan often can have a rigorous approval process and may require collateral. This might be an issue for small businesses that are just getting started or those that don’t need a large amount of funding. Businesses will want to consider the interest rate and longer repayment terms and how that might affect the total cost of the loan. Borrowers may also want to look for lenders who do not have prepayment penalties, which would allow them to make additional payments to the principal of their loan and potentially reduce the amount of interest that accrues over time.
What Is a Short-Term Business Loan?
Short-term business loans are designed to meet more immediate funding needs, with shorter repayment periods. Short-term loans often range from six months to a year, though some may offer up to 18 months of repayment time. If a small business is dealing with unexpected demand, looking to hire employees, or hoping to take advantage of an immediate business opportunity, a short-term loan might help provide flexible and quick business funding.
These types of loans often have less restrictive loan requirements, given their smaller funding amounts and quick repayment times. They also do not often require collateral.
Pros and cons of short-term business loans
Short-term loans may offer more flexibility than you may find with long-term loans.
The collateral and credit requirements lenders may impose to secure this financing could mean businesses will be charged higher interest rates and fees compared to long-term financing. Because loan repayments could happen within 18 months or less after a loan is taken, lenders may charge more in interest or add additional fees to maximize their profits.
Monthly payments for short-term loans may be higher than those for long-term financing. However, the amount of interest charged to borrowers for a long-term loan could end up higher, depending on the length of repayment time and the interest rate.
Which Is Better: Short-Term or Long-Term Financing?
In the end, the type of funding option you choose will depend on your business needs and how you plan to use the funding. You may consider a long-term loan if you need to borrow a large amount or are looking to fund a long-term investment, like buying a new piece of equipment or acquiring another business. But short-term loans might work better if you need to access fast financing to cover expenses like payroll or cash flow gaps.
Regardless of which loan type you decide to pursue, it’s important to make sure you understand the loan terms and repayment options before you apply for financing with any lender.
Growing small businesses have many financing options, including the American Express® Business Line of Credit1, which offers flexible access to funding (subject to eligibility requirements, application, and approval).
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1 American Express® Business Line of Credit offers access to a commercial line of credit ranging from $2,000 to $250,000; however, you may be eligible for a larger line of credit based on our evaluation of your business. Each draw on the line of credit will result in either a separate installment loan or a single repayment loan. All loans are subject to credit approval and are secured by business assets. Every loan requires a personal guarantee. For single repayment loans, we charge a total loan fee that ranges from 0.95%-1.80% of the amount you borrow for 1-month loans, 1.90%-3.75% for 2-month loans, and 2.85%-6.05% for 3- month loans. Single repayment loans incur a loan fee at origination and the principal and total loan fee are due and payable at loan maturity. There are no required monthly repayments for a single repayment loan. Repaying a single repayment loan early will not reduce the loan fee we charge you. For installment loans, we charge a total loan fee that ranges from 3-9% of the amount you borrow for 6-month loans, 6-18% for 12-month loans, 9-27% for 18-month loans, and 12-18% for 24-month loans. Installment loans incur a portion of the total loan fee for each month you have an outstanding balance. If you repay the total of the principal of an installment loan early, you will not be required to pay loan fees that have not posted for subsequent months. For each loan that you take, you will see the applicable loan fee before you take the loan. Once you take the loan, the loan fees that apply to that loan do not change. We reserve the right to change the loan fees that we offer you for new loans at any time. American Express reserves the right to offer promotions to reduce or waive loan fees from time to time. Not all customers will be eligible for the lowest loan fee. Not all loan term lengths are available to all customers. Eligibility is based on creditworthiness and other factors. Not all industries are eligible for American Express® Business Line of Credit. Pricing and line of credit decisions are based on the overall financial profile of you and your business, including history with American Express and other financial institutions, credit history, and other factors. Lines of credit are subject to periodic review and may change or be suspended, accompanied with or without an account closure. Late fees may be assessed. Loans are issued by American Express National Bank.
Single repayment loans may become available to eligible existing and new Business Line of Credit customers at different times.
