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When you borrow money for your business, you have the choice of borrowing it for a short period of time, like a year or less, or for a longer period of time, like several years. There are pros and cons to each approach.
A key difference between the two is how much you'll pay per month and what your total cost will be. Borrow for a shorter period of time, and you'll pay less in interest. However, this also means you'll have to pay back more each month. Conversely, if you borrow money for a longer period of time, you'll pay less per month, but the total amount of interest you pay will increase. The goal is to match the loan to what you need.
I'll go over several different loan options and show you what the same $50,000 costs across four different repayment scenarios. I'll also cover what to look for when you're evaluating lenders, and walk you through a few business situations where different options make sense. This should help you make an informed decision about the right loan type for your business.
Short-term financing | Long-term financing |
|---|---|
| Approval can come as fast as same day | Approval takes weeks to months |
| Interest rates run higher than long-term options | Typically carries a lower interest rate than short-term financing |
| Funds get repaid quickly, usually within one to two years | Repaid over a longer period, from about five years up to 25 |
| Suits businesses facing unexpected expenses or short-term cash flow issues | Suits businesses that need money for major investments or expansion |
Take a look at these two scenarios below. Do either seem familiar?
Scenario one, unexpected expense: You need to cover a high and immediate cost. That's short-term financing.
Scenario two, major investment: You need a large sum for a specific purpose, like purchasing new equipment or expanding your current operation. That's long-term financing.
That's how you can tell whether short-term financing or long-term financing makes sense for your business. Now, let's go over some of the different types of loans available for each.
Types of Short-Term vs. Long-Term Business Loans
Below are some of the most common types of short- and long-term loans and their characteristics.
| Loan type | Term length | Interest rate | Repayment schedule | Maximum amount | Best use |
|---|---|---|---|---|---|
| Merchant cash advance | No fixed term, tied to sales volume | Factor rates range between 1.08 and 1.45 | Daily, weekly, or monthly, based on sales volume | Up to $5 million | Covering cash flow gaps, emergency expenses, and urgent repairs |
| Business line of credit | 6 to 36 months, revolving | APRs starting at 6% | Weekly or monthly, interest only on what you draw | Up to $5 million | Flexible working capital and seasonal swings in revenue |
| Equipment financing | 12 to 72 months | APRs starting at 6%, secured by the equipment | Monthly | Up to 100% of equipment cost | Purchasing machinery or technology paid off over its life span |
| SBA 7(a) | 10 to 25 years | Among the lowest available | Monthly, steady and predictable | Up to $5 million | Expansion, real estate acquisition, refinancing, large purchases |
| Home equity line of credit | Up to 30 years | Variable, as low as the prime rate | Monthly, interest only on what you draw | Up to $750,000 | The longest horizon and the lowest monthly payment |
Some popular short-term options include a merchant cash advance (MCA) and a business line of credit. MCAs are quick to fund but costly, and they make your repayments depend on daily, weekly, or monthly sales. Long-term options, such as SBA loans and equipment financing, take longer to close but can reduce the monthly payment amount. Ultimately, the choice depends on how urgently you need the money and how consistent your revenue is.
Choosing a Repayment Period
Repaying your loan over a shorter or longer period affects how much you pay per month, as well as the overall cost of the loan. Below are payoff scenarios for a $50,000 loan across four repayment periods.
| Repayment term | Estimated rate | Monthly payment | Total interest paid |
|---|---|---|---|
| Six months | Approximately 10% APR | $8,578 | Approximately $1,470 |
| Five years | Approximately 8% APR | $1,014 | Approximately $10,830 |
| Seven years | Approximately 9% APR | $804 | Approximately $17,570 |
| 30 years, via a home equity line of credit | Approximately 10% variable | $439 | Approximately $108,000 |
Your selection of repayment period impacts your business's cash flow, your cost of capital, and how your loan obligations appear on your company's balance sheet. Whether you choose a short-term or long-term loan changes how your liabilities show up there, and how lenders and investors read your business's financial situation.
Selecting the right repayment period lets debt function as a tool that supports your business goals.
Minimum Qualifications
$10,000 in monthly revenue
Your business must earn at least $10K per month in a business bank account.
500+ credit score
You can get approved with any credit score. But the better your credit rating, the better interest rates lenders offer. Your FICO score should be above 500.
Minimum six months in business
Your company should be operational for a minimum of six months. This shows business lenders that your company is sustainable and won't go out of business.
Have a business bank account
Your Clarify advisor will need three or four months of your most recent bank statements to verify income. This is just to see you're actually making $10K+ month in revenue.
What To Consider When Shopping for a Lender
While interest rates do matter, several factors separate a good offer from a poor one. Here's what to weigh before signing an agreement with a lender.
Understand the cost as an APR
Request the annual percentage rate (APR) in addition to the factor rate or flat fee, so you can compare each lender's offer fairly.
Understand how often you'll pay
How frequently you pay through debits against your account, daily, weekly, or monthly, can affect your cash flow in ways that a single monthly payment doesn't.
Review all fees charged
Origination fees, servicing fees, and prepayment penalties all add to the total cost of obtaining and repaying a loan. Make sure you understand every charge prior to signing.
Determine when approval will occur
Same-day approvals versus approvals taking anywhere from 30 to 90 days can significantly impact your ability to get financing. Understand the estimated timeframe before making commitments.
Know what assets are pledged
Securing a loan with assets like equipment or your home provides collateral against default, and pledging a personal guarantee creates additional liability. Understand exactly what's pledged.
Compare multiple offers
A marketplace lets you evaluate multiple lender offers on an apples-to-apples basis, rather than relying solely on a single lender's representations.
Which Loan Is Right for Your Financial Situation?
Below are several examples of financial situations that businesses often find themselves in, along with the types of loans that might suit each one. This list includes only general examples, and everyone has unique financial requirements. Working with a lending advisor will help you identify which option fits your business.
| Your situation | Loan type that tends to fit |
|---|---|
| Immediate need for money, from $2,000 to $500,000, to cover a cash flow gap in less than two days | Short-term loans, lines of credit, or merchant cash advances |
| Strong credit history, cost is the priority, no urgency on timing | SBA loans |
| Credit isn't ideal but revenue is consistent | Short-term loans or merchant cash advances |
| Income fluctuates by season and you want the ability to draw and repay funds | Business lines of credit |
| Buying heavy machinery or vehicles and want financing where collateral provides security | Equipment financing |
| Own a home and seeking the option with the lowest possible monthly payment | Home equity line of credit |
Real-World Use Cases
First, let's consider a small retail operation that experiences a rapid increase in customer demand. To restock its shelves quickly and meet the increased volume of sales, the store owner uses short-term financing. Short-term financing enables the retailer to capture the sale and the revenue associated with those sales. It does place strain on the store's working capital until that inventory sells and turns back into cash.
Now, let's examine an established retailer that has decided to expand its operations by opening a new location. By selecting a long-term loan, the company is spreading out the construction expenses for its new facility over a series of years at a lower interest rate. By choosing this type of loan, the retailer can maintain a relatively stable monthly budget while still creating opportunities for continued growth and expansion.
The primary drawback associated with this approach is that the retailer is committing itself to a long-term obligation that will remain on its balance sheet for many years.
If you're starting your business, most lenders, including Clarify, will typically require you to have at least six months of business history prior to approving your request.
Eligibility Requirements and Documentation Checklist
When applying for a loan, lenders evaluate both your personal credit history and your business credit history. They use this information to determine the extent of risk associated with providing you with a loan, the loan amount, and interest rate.
Having a high credit score will provide you with access to better loan terms, such as lower interest rates and larger loan amounts. Conversely, having poor credit may limit your ability to qualify for certain types of loans or raise the interest rate on those that you do qualify for.
The typical documentation requirements include:
Bank statements
These show cash flow and account balances. Clarify asks for three to four months.
Tax returns
Both personal and business tax returns are necessary in order to verify your income.
Financial statements
Typically, profit and loss statements, balance sheets, or cash flow projections.
Business licenses and incorporation documents
Necessary to confirm your legal structure.
Debt schedule
A list of all existing loans and liabilities.
Identification documents
A driver's license or other valid government-issued identification.
Having all of this documentation ready to go before submitting an application will speed up your loan approval and indicate to lenders that you operate efficiently and effectively.
Making the Smartest Loan Decision for Your Business
There are three main considerations when deciding which type of loan is best for your company: The length of time you'll take to repay the loan, the interest rate charged by the lender, and what you plan on using the borrowed funds for.
Because every organization is different, it's worth discussing your alternatives with someone who reviews offers full-time. Apply today with Clarify Capital, and a lending advisor will review your options with you. Checking your options will not affect your credit score.
Frequently Asked Questions About Short- vs. Long-Term Loans
Below, I've written out straight answers to the most common questions that I hear about these loans.
Are All Five-Year Loans Long-Term?
Yes. The lending industry has a general rule of thumb. All terms greater than three years are considered long-term. Any business term loan longer than 36 months typically falls into this category.
What's Best for Your Business, a Short-Term or Long-Term Loan?
It's neither, by itself. Credit, cash flow, and the urgency with which you need access to funds will determine which one fits. A short-term loan may be cheaper over time. A long-term loan may be easier on a monthly basis.
Which Loan Term Is Right for Your Business?
Consider what the borrowed funds are going toward and when those funds are expected to generate cash again. For example, if you're purchasing inventory that sells in 90 days, a short-term loan likely matches the timeline. If you're purchasing a building or equipment that you plan to use for 10 years or more, extending the repayment period may make more sense. This is where many businesses make their biggest mistake. They mismatch the length of the financing with the length of the asset purchased.
Can I Refinance a Short-Term Loan Into a Long-Term One?
Yes. Refinancing a short-term loan gives you an extended repayment period, thereby lowering your monthly payments and helping alleviate cash flow pressures. Typically, the lender will require you to have stronger credit or show improved business performance compared to when you initially obtained the first loan. Lenders look for evidence of successful repayment prior to offering a longer term.
What Does My Monthly Payment Look Like on a $50,000 Business Loan?
Your monthly payment depends on the length of the loan and the rate. As an example, at approximately 8% interest over five years, your monthly payment will be around $1,014. At approximately 10% interest over six months, your monthly payment will be around $8,578. Both of these are the same $50,000. Your Clarify lending advisor can show you specific payment scenarios based on your qualifications.
Is My Information Safe When I Apply?
Clarify follows SOC 2 security principles. A lending advisor can answer any question about how your application gets handled before you send anything over.
Bryan Gerson
Co-founder, Clarify
Bryan has personally arranged over $900 million in funding for businesses across trucking, restaurants, retail, construction, and healthcare. Since graduating from the University of Arizona in 2011, Bryan has spent his entire career in alternative finance, helping business owners secure capital when traditional banks turn them away. He specializes in bad credit funding, no doc lending, invoice factoring, and working capital solutions. More about the Clarify team →
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