Why Long-Term Financing Isn’t Always the Answer

What type of financing is the best? You may think the answer is long-term loans with their ultra-low interest rates and 25-year repayment options. Sometimes, this is true, but not always. Short-term loans also play an essential role in modern business. When do both of these options shine?

What Are the Benefits of Long-Term Loans?

The benefits of long-term financing are well-known. When you have 15-25 years to pay back a purchase, you can divide the total into small monthly payments that are comfortable for your company.

Traditional bank loans, SBA 7(a), and SBA 504 loans are a few examples of these low-interest financing options. They can save your company significant money for huge purchases, such as real estate or heavy machinery.

What Downsides Does Long-Term Financing Have?

In a way, long-term loans are like planting a seedling instead of having a landscaper plant a mature tree in your backyard. You save money with the seedling, but you also have to put in a lot more work. You have to wait patiently for it to grow.

SBA loans are similar. They have so many different requirements that completing the application can take several months or more. Traditional loans also require your business to have an excellent credit rating and a strong history of annual revenue.

If you’re not in a hurry, there’s no problem. When you need to complete a purchase quickly, however, long-term loans are too slow to be helpful.

Why Are Short-Term Loans Vital for Today’s Businesses?

In the world of modern business, many day-to-day needs fall into the “urgent” category. You have to order inventory for your customers, cover payroll needs, and make lease payments for your building. There are taxes, advertising costs, and emergencies to deal with, too. Plus, if business opportunities appear, you may need to come up with capital very quickly or miss out.

Short-term loans help in exactly this situation. They have higher interest rates, but they’re also much faster and more flexible than traditional financing. Many businesses can qualify regardless of their past credit rating or current revenue situation. Whether you need to order inventory ASAP or close quickly on a real estate opportunity, you can get your funds in about a week, sometimes even faster if you’ve used this method before.

Which Industries Use Short-Term Loans?

Real estate companies use short-term financing for many property purchases. After reselling the property, it’s easy to pay off the loan. Manufacturers and other B2B companies also use this financing frequently.