Long Term Loan Vs Short Term Loan

Long Term Vs Short Term Business Loan

24 Jul 2020
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Business loans can often be the driving factor behind a business’ growth. With the help of a loan, you are able to equip your business with office space, essential materials, machinery, and more. At some point or another, any business can greatly benefit from a loan. This is where business loans enter the picture. A business loan can help you not only sustain but also grow your business with the help of new inventory, upgraded equipment, new cash flow into upcoming projects and operations, and the like.

Business loans are often classified by loan providers as short term or long term business term loans. Each of these two types of loans is specially tailored to meet certain business needs. Each of these types of loans also has its own unique advantages. Are you considering funding your business venture through the aid of a business loan? Find out here which type of business loan is best suited to your needs.

What are Short-term Business Loans?

As the name suggests, one can opt for a short term business loan for a smaller duration. This time is usually a little more than a year. The benefit of a short term business loan is that it offers instant liquidity for pressing needs such as sticking up on essential inventory items, paying back vendors, maintaining a seasonal flow of cash, and more. Usually, business loans can require some form of collateral which ensures that your vendor is duly compensated in case monetization falls short.

However, as short term business loans are taken on with such a small duration, no collateral is necessary to avail them. As you are able to apply without pledging any asset as a security for the loan, it’s very convenient to opt for a short term loan. Such loans also necessitate minimal documentation as compared to long term business loans.

What are Long-term Business Loans?

In contrast to a short term business loan, a long term business loan offers higher amounts and comes with a longer tenor. The duration for which one can seek out a loan is usually 5 to 10 years or more with a long term business loan. Since these loans are much heftier and paid over a longer duration, they may be taken for purposes like purchasing state of the art machinery, expanding one’s business to other locations, and upgrading the business’ infrastructure.

In short, long term business loans entail a larger repayment amount. Hence, you may be required to pledge an asset as collateral to avail of these loans. Loan disbursal is also a slightly more long-drawn process for long term loans in comparison to short term business loans. This is because lenders usually ask for additional documentation like a soft copy of your company’s balance sheet, for instance, to verify your loan application.

Essential Documentation for a Business Loan

Now more than ever, multiple small, medium, and large enterprise businesses are vying for loans. By keeping all necessary documents handy, you speed up your own loan request’s approval from your lender. Keeping your documents handy may also give your lender the impression that you are well prepared and organized for your upcoming business venture. Each lender is different and may require a unique set of specific documents during the loan application process.

Do your research to avoid roadblocks on the way to getting your short term or long term business loan. Do remember that, depending upon the lender, you may be asked for additional documents such as your company’s ‘Articles of Association’ and ‘Sole Proprietorship Declaration.’ There are, however, certain essential documents that you should be prepared with regardless. These are the following:

  • Identify proof like Aadhar card, PAN card, passport copy.
  • Address proof like driving license, electricity bill, bank statement.
  • Latest bank statement showing balance for at least 6 months.
  • Latest ITR (income tax returns) showing the computation of your balance sheet, income for the last 2 years, and profit and loss A/C.
  • Proof of continuation for your business.

Which Business Loan is for You?

To discover whether you will benefit from a short term or long term business loan, draw out a plan of what you want to use the loan money for. A clear and short term goal will require a short term business loan. A larger and longer-term goal will necessitate the help of a long term loan. You should also address the question of collateral and whether you can easily pledge some asset as security against your loan.

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