Availing a business loan is often an integral part of doing business. A number of business expenses can crop up without advance notice, making you dependent on a line of credit for financing your business operations. A loan allows you to avail funds now and pay later for essential business expenses such as vendor payments, thereby freeing up your working capital for a healthy cash flow.
While the most important decision to make in this regard concerns the amount to be applied for as a loan, a key decision to make is the term or tenure of the business loan. In fact, the tenure will directly impact the amount and repayment terms of the business loan. Loans are generally categorised as short-term and long-term.
A short-term loan is often secured in as short a time as 24 hours. It is a quick turnaround solution for businesses in need of immediate working capital or funds to overcome temporary financial setbacks. The repayment term generally varies between one and 24 months, and as a result, the loan amount is smaller. Some of the common applications are for replenishing of working capital, purchase of small equipment, inventory and supply chain finance, emergency repairs, and so on. Some of the commonly availed short-term finance options are:
A number of credit agencies easily lend out short-term loans, some of them being traditional banks, financial institutions and alternate lenders such as online lenders.
A long-term loan involves multi-year repayment options, often extending into decades. This means that the interest builds up over time, and the business ends up paying significantly more. Traditional lending channels such as banks are more likely to provide long-term business finance. Applying for a long-term loan often calls for lengthy and stringent documentation that assesses the health of your business.
How to choose between the two
The type of loan you opt for depends on a number of factors that are primarily related to nature and growth stage of your business.
The points given above will help you determine whether you need a short-term loan or a long-term one. As a generic rule, remember to opt for a short-term loan in cases where you are sure to receive money soon. For example, if the processing on an already placed order is pending but expected soon, leading to an interim monetary crunch, a short-term loan can provide relief to your business. However, one must remember that a loan ultimately means debt, and any debt must be carefully scrutinised at the outset. Interest rates, amount limits, repayment tenures, default terms, extension terms – make it a point to evaluate each of these against your financial inflows before you take a business loan.
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