There are a lot of things to consider when taking out a business loan. How much should you borrow? Who should you borrow from? Will you be able to pay it all off if something goes wrong?
One of the biggest factors to consider is the term length of the loan. Depending on the type of business you own, how much funding you need, and other factors, you may only need a short-term loan. It’s important to understand that, generally speaking, the longer the term, the more money you’ll ultimately pay back since you’ll be paying interest. On the flip side, a short-term loan may be too much for you to pay back, or it may not allow you to borrow enough.
In general, there are three different term lengths available to business owners: short, intermediate, and long-term loans. Depending on what your cash needs are and the type of business you own, one may be better for you than the others.
Short-Term Loans – The length of a short-term loan is only about a year. Short-term loans are a great option for businesses that need cash in the moment and who expect to make back the loan and more in profits in the coming months. Short-term loans don’t usually require collateral and are also a great way for businesses to build credit. As you pay off the loan, you’ll build trust with your lender and will be able to qualify for bigger, longer-term loans if (and when) you need them.
Intermediate-Term Loans – The length of an intermediate-term loan is between one and three years. Most businesses use intermediate-term loans to cover the costs of computer systems, equipment, and other expenses that last a few years rather than decades. Intermediate-term loans are not the best option for everyday expenses. While short-term loans are fairly easy to qualify for, the approval process for intermediate-term loans is stricter and will typically require collateral and a guarantee.
Long-Term Loans – The length of a long-term loan is somewhere between three and ten years. Because the amount you can borrow is typically much larger, require collateral, and are subject to limiting restrictions, most businesses use them for purchasing a building, durable and expensive equipment, inventory, or similar long-term investments. It’s important to note that long-term loans require a down-payment, and throughout the term of the loan, many lenders will require you submit financial statements to ensure everything remains in order.
The type of loan that will be best for your business will depend on how much you need, what you need it for, and the type of business you own and operate. For example, certain industries do best with specific term lengths because the needs in those industries typically serve one time frame better than the others. Here are some common industries and the best loan term lengths for each:
Seasonal, construction, retail, startups – These businesses do best with a short-term loan because their income varies throughout the year and may need extra materials or inventory on short notice. For them, going through the process of securing a long-term loan, putting up the collateral, making a down payment, then paying back the loan for an extended amount of time wouldn’t be worth it. Typically, these businesses only need cash to get them through the slow season or to hold them over for a short amount of time.
Dental, medical, restaurants – These types of businesses do best with an intermediate-term loan. Because it’s important to have up-to-date, durable equipment in these industries, it may require more than just a short-term loan, but the amount needed to get the equipment may not justify a long-term loan.
Manufacturing – These businesses do best with a long-term loan. Manufacturers require state-of-the-art facilities and often need special equipment to fulfill the orders placed by customers. They also need to ensure that buildings are furnished with the equipment needed for employees. Because all of that can cost quite a bit and may take a while to pay off, a long-term loan would be a good option for those in the manufacturing industry.
The term length for a business loan can have a major impact on your business. It’s important to make sure you carefully consider your options and choose the right term length for you. It’s also important to make sure you choose the right lender when taking out a loan since the lender you choose can affect your business as well. Which term length do you think is best for your business?
If you have any questions about different loan term lengths or lenders, contact us now.