Long-term vs short-term financing

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Refinancing your business can feel daunting. Do you need a quick fix to cover a cashflow shortfall, or are you looking to invest in growth opportunities? Our handy guide to short-term finance and long-term financing options will help you make an informed decision that meets your needs.

What is short-term financing?

Short-term loans are a flexible way to cover emergency expenses or cashflow gaps. They’re a quick solution for immediate financial needs, with a typical repayment period of up to eighteen months.

Short-term finance can be an ideal solution for small businesses. Lending requirements are typically more relaxed, so you won’t need high revenues or an excellent credit score to secure a loan. Unfortunately, the flip side is that they may also have higher interest rates.

How can I use a short-term loan?

Short-term loans are generally used for unexpected expenses or emergency funding as they’re quick to arrange. But they’re also helpful if you’ve taken on a new project and there’s a funding gap between starting work and being paid. Seasonal businesses also find short-term loans an effective way to offset the lack of income from the off-season.

Pros and cons of short-term finance

Short-term loans are generally easier to arrange and have more flexible borrowing requirements, so you have cash in your account quickly. In addition, making regular daily or weekly repayments can boost your credit score, giving you access to long-term financing at lower interest rates.

However, you’ll need to be able to start making repayments immediately. And you can expect to pay higher interest rates for the convenience of quick cash.

What is a long-term loan?

Long-term loans are the best way for your business to align your long-term goals with your capital. With lower interest rates and typical repayment terms between 2-5 years or longer, long-term loans let you access higher borrowing with lower risk.

However, long-term loans come with stricter lending requirements and repayment terms. Therefore, you’ll typically need to be a well-established business with a solid credit score and financial turnover before being considered for long-term financing.

As a result of the higher funds involved, you’ll often be required to secure your loan against collateral like property or other business assets. In addition, lenders may place constraints on how you can use the loan.

What are long-term loans used for?

Long-term loans are the intelligent choice for businesses looking to expand and invest in property or machinery. Long-term funding means your business is independent of finding new funding partners who may need to gain in-depth knowledge of your sector.

However, they can also be a good fit for businesses looking for a significant cash injection with affordable repayments or when you want to avoid costly repayments and cashflow pressures.

Pros and cons of long-term financing

With manageable monthly payments and lower interest rates, long-term financing helps you plan for repayment and avoid cashflow crises. And lower interest rates can help you finance business investments while building your credit history. So if you want to refinance with minimal risk, a long-term loan is a robust solution.

Conversely, a long-term loan isn’t the right solution if you need quick financing options because long-term financing often has a longer lead time. In addition, your business may need an excellent existing credit score, a minimum two-year operating history and existing collateral to qualify. And should your income decline, you might find making repayments increasingly challenging.

Find bespoke financing options with Funding Round

At Funding Round, we’re more than just a finance broker. We offer various funding options and a personalised service to help you make the best decisions for your business. So contact the team to see how we can help you refinance your business today.