Short Term Business Loan vs. Long-Term Financing: Which Option is Better?

When you’re seeking financing for your small business, is it better to seek a short term business loan or long-term financing? Knowing the answers to a few simple questions can help you decide.

What’s Your Debt-to-Asset Ratio?

The first thing to consider is debt load and its relationship to the assets that the financing will help fund.

For example, a mortgage for a house may be paid back over 30 years, and the house should be good and usable for at least 30 years. Similarly, an automobile is typically paid back over 3 to 5 years, and an automobile is expected to last at least that long.

However, small business owners do not often consider this ratio when seeking funding. For instance, if purchasing inventory which will be used up within 90 days, business owners might use a credit card. But if the debt is not paid back within 90 days, instead paying the minimum payment, the debt may not be paid off for more than the next 10 years! In addition, finance charges will accrue during that time, increasing the amount of debt overhang.

Many business owners get stuck in a cycle of credit-card debt by maxing out card after card and are then tied down to monthly payments. It is hard to get out of the cycle of paying minimum payments, just to stay current. But because of the length of time it takes to pay off the debt this way, it ends up effectively being closer to a 20-year amortization, which doesn’t make a lot of sense for something that was used up in 90 days.

What Long-Term Financing Sources are Best?

When funding capital improvements, such as large equipment, which is going to be used for at least 5 to 10 years, it’s a good idea to seek a SBA loan, because you can get the best rates. These loans are typically paid off over 5 to 7 years.

It is a good idea to carry a business credit card, although it is best to get in the habit of paying it off at the end of each month.

What Short Term Financing Sources Are Best?

If your needs are along the lines of a 6- to 12-month period — inventory, marketing, hiring new employees — a business cash advance or merchant cash advance works very well. Since these sorts of financing force you to pay them off within a fixed window, you know what the fixed cost of your financing will be.

The way that these advances are paid back is similar to a 401k. An automatic payment is made every month, which also makes it much easier to keep up with payments.

If you are seeking funding for multiple purposes — some longer term and some short term — make an effort to line up the sources of funding with the length of use of the assets purchased. So a short term option such as a business cash advance could be used to finance short term needs such as inventory; and a long-term option such as a SBA loan could be used to fund a capital improvement.

To find out quickly how much financing you can get through a cash advance, visit Swift Capital offers a simple tool that will tell you how much funding you can have access to for your business, simply by plugging in a few simple numbers.