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Getting financing for your business can be difficult, especially considering that the impact of every dollar spent and every deadline creates a tremendous strain on your bottom line. Maybe you need immediate access to cash to fund employee payroll, or you need to fund an expansion. Regardless, the decision to choose a short-term loan versus a long-term loan is ultimately decided by how long you intend to take to pay back the loan.
That repayment period determines more than just the number of dollars you'll have to pay each month. It also impacts your cash flow, the total amount of interest and fees you'll incur to secure the loan, and the level of flexibility you have to maneuver as your business evolves.
You'll get the funds quickly through a short loan, but the amount of each monthly payment will be higher. Conversely, you'll enjoy a low monthly payment and a significantly reduced amount of interest over time through a long loan.
I'm Michael Baynes, co-founder of Clarify Capital. Below, I cover both short-term and long-term loans, run actual examples using a $100,000 loan, and describe how to select a term suitable for your needs.
Short-Term vs. Long-Term Business Loans
Short-term loans typically range in duration from three to 18 months, and you often repay them on a daily or weekly basis. They're designed to address immediate cash flow gaps, cover emergency situations, or capitalize on timely opportunities. Many of the online lenders who offer these types of loans provide rapid approvals and minimal documentation.
Long-term business loans generally range in duration from two to 10 years, with fixed monthly payments. They serve as a good fit for larger projects such as purchasing equipment, expanding, or refinancing existing debt.
Traditional banks, SBA programs, and some of the online lenders that operate in this space require a thorough analysis of your company's financial status prior to approving long-term financing. Long-term financing typically carries lower interest rates, but the borrower commits to repaying the loan for a substantially longer period.
Short-Term Business Loans, Pros and Cons
Typically, short-term loans include higher fees due to their shorter repayment periods. Long-term loans frequently include lower interest rates, but borrowers commit to making larger loan repayments over a longer period.
When deciding between short-term and long-term financing, each borrower must evaluate and balance competing priorities, including their ability to service cash flow, the potential risks associated with loan repayment, and the future goals of their business. Below is an evaluation of the pros and cons of short-term loans.
| Short-Term Business Loans | |
|---|---|
Pros | Cons |
| Fast approval and financing, in many cases as fast as same day | The biggest drawback is that repayment can create significant pressure on cash flow |
| Less restrictive credit standards than long-term financing options | Higher interest rates or fees may be incurred |
| Less total interest paid, due to the shorter repayment period | Loan amounts may be limited due to the repayment terms |
| More flexible options for addressing urgent, short-term needs | Higher effective APR than long-term financing |
Long-Term Business Loans, Pros and Cons
Long-term financing represents a fit for growing companies with predictable and consistent cash flow. Steady and consistent monthly payments allow businesses to invest in larger-scale initiatives such as equipment purchases, expanding into new markets or locations, or refinancing other forms of existing debt.
If planned accordingly, long-term financing enables companies to achieve financial stability and establish meaningful relationships with lenders. Borrowers benefit from larger loan amounts while maintaining manageable monthly payments through longer repayment terms. Here are the pros and cons.
| Long-Term Business Loans | |
|---|---|
Pros | Cons |
| Payments are more predictable and minimize disruption to cash flow | Often requires strong credit scores, collateral, or both |
| Easier to qualify for larger loan amounts through longer repayment terms | Higher total amount of interest paid over time |
| Supports achievement of longer-range business objectives | Restricts flexibility by creating longer commitments |
| Strengthens the relationship between company and lender | Slower approval, more documentation |
Short-Term vs. Long-Term: Which Is Better for Your Business?
Ultimately, choosing between short-term and long-term financing depends on your individual circumstances, including immediate business needs, cash flow cycles, and your overall strategy for growth.
Use short-term financing if you require quick capital to purchase inventory, market your products or services, or fund payroll, and you anticipate repaying within months. Use long-term financing if you're planning to purchase expensive equipment, expand your operations, or refinance other forms of existing debt.
A Third Option: HELOC
If you own your primary residence, consider a home equity line of credit (HELOC).
A HELOC is the longest-term route on the table, with repayment that can stretch up to 30 years, which makes the monthly payment the lowest of any option here. Although the HELOC is secured by your primary residence, it does differ from traditional business financing in that lenders view your personal finances, not your business finances. HELOCs may be a good option for business owners whose businesses do not yet generate enough revenue or history in order for lenders to approve traditional business loans.
But remember, your house acts as collateral, so you could lose it if you default on the loan. Since the interest rate is variable (and directly linked to the prime rate), your monthly payments can fluctuate over time. Unlike fixed-rate term loans with set payments for five or seven years, your monthly payments may increase or decrease based on interest rate fluctuations.
How Payments Look on a $100,000 Loan
Assuming a small to midsize business (SMB) borrows $100,000, below is how the term of a loan influences the repayment schedule and total cost.
| Loan term | 1-year at 15% | 5-year at 9% | 30-year HELOC at 10% variable |
|---|---|---|---|
| Payment type | Fixed monthly | Fixed monthly | Variable, prime-based |
| Monthly payment amount | $9,026 | $2,076 | $878 |
| Total repayment | $108,310 | $124,550 | $315,926 |
| Amount of interest paid | $8,310 | $24,550 | $215,926 |
This chart shows that selecting a shorter repayment period gets you lower total costs with larger monthly payments. While selecting a longer repayment period gets you lower monthly payments, it increases the total cost. Also note that the last column includes an example of HELOC pricing, and the HELOC price will likely vary based on factors including changes in the prime rate.
What To Consider When Choosing a Loan Term
Several considerations are important when evaluating repayment terms. Here's what to keep in mind.
| Factor | Why it matters |
|---|---|
| Credit profile | Stronger credit allows for access to more financing with better terms than weaker credit. |
| Historical cash flow performance | Lenders will want evidence that you have adequate historical cash flow to support your repayment obligation. |
| The amount of financing requested | Larger amounts are typically sought in applications for longer-term financing opportunities. |
| Timeframe for estimated return on investment (ROI) | This timeframe assists you in determining when it would be economically prudent to make payments on the loan. |
How Clarify Capital Can Help
At Clarify Capital, we connect small and midsize business owners with financing tailored specifically to their needs, drawing on our network of 75+ vetted, reputable lenders. Whether you're seeking immediate funding for a temporary cash flow shortage or funding for ongoing growth, we help match your business with both short-term and long-term financing options.
Our U.S.-based lending advisors guide you throughout this process, providing personalized attention from a real person rather than an automated system or a call center. Whether you need fast access to working capital or financing for sustained growth, apply today and check your options.
FAQ About Short-Term vs. Long-Term Business Loans
Still have questions about these loans? Below, I've broken down the most common ones I hear from SMBs
How Do I Decide Which Loan Is Best for Me?
There are a few things to consider. First, is your credit score. Good credit opens up other possibilities, such as using an SBA loan. Second, your ability to generate cash flow, to ensure that you can afford your monthly payments. Third, the loan amount itself. Generally speaking, larger loan amounts will be approved for longer repayment periods so that your monthly payments remain affordable.
The last thing to consider is where your return on investment (ROI) stands. Will your business make enough money for you to repay your loan based on the length of the loan? Because every business is unique, working with a lending advisor will help you understand what options are available to you.
How Much is a Monthly Payment on a $50,000 Short-Term Business Loan?
This'll depend on the principal amount of the loan, the interest rate, and your repayment plan. There are some types of short-term loans that may call for daily or even weekly payments rather than monthly payments. These would affect how well you could control your cash flow.
As an example, if you borrowed $50,000 at 15% annual interest over 12 months, you might expect a monthly payment of approximately $4,500 per month, depending on the fees associated with the loan and its structure. Most short-term loans are designed to allow for rapid payoff of the loan to address immediate needs or to fill a gap in capital.
How Much Will I Have To Pay per Month on a $50,000 Long-Term Business Loan?
When borrowing through long-term loans, you would typically be spreading out your payments over many years. This type of loan option has the disadvantage that while you'll pay less each month for the life of the loan, you'll end up paying more in total interest.
As an example, if you were to take out a $50,000 loan and pay it off in five years at 9% annual interest, you could expect to pay approximately $1,040 per month. While that's substantially less than you would have to pay to service a short-term loan for the same amount of money, it'll still take longer to pay off the loan and increase the total amount of interest you pay. This option works best when you need to make regular, manageable payments over a period of time and don't need to use that money immediately to support growing your business.
Why Is Managing Your Cash Flow Important to Your Company's Success?
Managing your cash flow properly helps maintain a healthy company. Maintaining proper cash flow allows you to fund daily operational costs, cover employee salaries, and avoid late payment penalties on financing. This puts your company in the strongest possible position to make informed decisions and respond quickly to unforeseen events.
Is My Information Secure When I Submit an Application?
Clarify follows SOC 2 security principles. A lending advisor can discuss any questions regarding Clarify's handling of applications prior to submitting any application material.
Michael Baynes
Co-founder, Clarify
Michael has over 15 years of experience in the business finance industry working directly with entrepreneurs. He co-founded Clarify Capital with the mission to cut through the noise in the finance industry by providing fast funding and clear answers. He holds dual degrees in Accounting and Finance from the Kelley School of Business at Indiana University. More about the Clarify team →
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