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Tata Capital > Blog > Short-Term Business Loans vs Long-Term Business Loans

Loan for Business

Short-Term Business Loans vs Long-Term Business Loans

Short-Term Business Loans vs Long-Term Business Loans

On average, a business loan tenure (a loan’s length) can vary anywhere between 12 months to 60 months. And based on the loan tenure, your loans are categorised either as ‘short-term’ or ‘long-term’. How do the two differ? Let’s find out.

Short-term financing vs long term financing

Choosing between the two financing options could mean a significant difference in your loan terms like:

  • Equated Monthly Instalments or EMIs
  • Total interest payable over the loan’s duration
  • Your loan amount eligibility

A long-term loan usually comes with lower EMI burdens, which are spread over a longer tenure. As a result, your monthly EMI payments do not affect your monthly cash flow cycles negatively.

In contrast, short-term business finance offers a shorter repayment period, allowing you to meet immediate cash needs, including working capital fluctuations and other operational expenses. You can also pay back the debt and free up your capital faster.

Additional Read: Short Term Business Loans – Pros & Cons

Moreover, traditional lenders usually apply stricter business loan eligibility requirements for long-term financing options since more risk is involved. Naturally, they rely on heavy documentation to ascertain you can pay back the loan timely.

Thus, when borrowing a business loan, you should always select the tenure wisely. And as a thumb rule, compute your EMI commitments in advance using an online business loan EMI calculator.

Key differences between short-term and long-term finances

 ParametersShort-term business loans Long-term business loans
Tenure A short repayment tenure ranges between 1 to 3 years.An extended repayment tenure, ranges from 5 to 10 years, even more in some cases.
Eligibility criteria Slightly more relaxed eligibility conditionsStricter eligibility conditions
Interest rateInterest charged is typically higher. Interest charged is comparatively lower.
Processing time They usually provide quicker access to funds, sometimes in only 24 hours. They usually have a detailed application process and may take a week or two.
Documentation Minimal paperwork Heavy paperwork
Disbursal timeQuicker disbursal – typically within daysDisbursal depends on the lender – may take a week or two.

The better choice?

Both financing options come with a host of advantages you leverage to meet your funding requirements. Ultimately, the final choice will boil down to how the two finance options align with your unique business needs. And one way to ascertain this is by answering the following questions:

How soon do you require the money?

If you can afford to wait for a little longer, usually a few extra days, you can avail of a long-term loan that offers lower interest rates. But if your requirement is immediate, short-term finance would be a better choice.

How good is your credit score?

If your credit score is high, your lender may be ready to grant you short-term finance at lower interest rates. The same applies to long-term finance too. But on the other hand, if your credit score is low, your chances of getting a loan could be affected.

How much EMI can you afford?

If your financial situation allows for paying larger EMIs, you can opt for short-term loans and advances. This way, you can clear up your liability quickly and maintain a good credit history.

How soon can you pay back the borrowed amount?

While a long-term loan would have smaller EMIs and lower rates, you may end up paying more in total, when compared to short-term finance with higher rates. So if your financial situation is to improve in the near future, short-term loans and advances will be more beneficial than long-term loans.  But if your returns could take some time to materialize, a long-term business loan would be more convenient.

Besides, for better estimates of your EMI commitments and interest payable over the loan’s duration, an online business loan calculator will be of immense help – allowing you to chalk out your finances favourably. This will also give you an idea of how much you will end up paying under both scenarios, every month and in total, making the choice easier for you.

Additional Read: 10 Benefits of Taking a Business Loan

Over to you

Are you looking for short-term or long-term finance at attractive interest rates? If so, then why not turn to India’s leading finance company – Tata Capital?

With us, get funds at a competitive business loan interest rate, for a tenure most agreeable to your business-specific requirements. Want to apply? Check our detailed eligibility criteria at Tata Capital website.

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