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When you’re on the hunt for financing for your small business, it’s completely normal to feel a wave of anxiety. Whether you’re eyeing a growth opportunity or just need a quick cash boost to cover expenses, the borrowing process can seem overwhelming. But fear not! With little knowledge, especially about the difference between short-term and long-term financing, you can confidently get through business finances struggles.
Short-term vs. long-term business financing: What’s the difference?
As you might guess, the main difference between short-term and long-term financing is how long you have to repay the loan. Short-term loans are usually paid back in a few months to a couple of years, while long-term loans can stretch over several years.
When deciding which option is best for you, consider the following:
- How much money do you need?
- How soon do you need it?
- Who will you be borrowing from?
- What type of collateral can you provide?
- What’s your business’s overall financial health?
Generally, short-term financing is suited for smaller amounts, while long-term financing caters to larger sums. With short-term loans, you’ll pay them back quickly, often at higher interest rates, and the approval process is usually faster. On the flip side, long-term loans come with lower interest rates but require a longer, more thorough approval process. A good rule of thumb is that short-term loans are often under $250,000, while long-term loans can reach up to around $500,000.
Finding your financing source
When it comes to long-term business financing, traditional brick-and-mortar banks are a common go-to. If you’re leaning toward a conventional short-term “term loan,” you might find yourself sitting across from a bank representative in a business suit, going through detailed applications and providing proof of your ability to repay. But the world of short-term lending has changed dramatically! You now have a range of options at your fingertips, including online lenders that can provide quicker approvals—no suit required!
According to Deskera, in 2020, 42% of small businesses sought loans from larger banks. However, the Federal Reserve’s Small Business report indicated a much healthier approval rate of 68% for these applications in 2022. On the flip side, Finder reported that 43% of small businesses applied for loans from smaller banks in 2020, with these institutions boasting an impressive 82% approval rate according to the same Federal Reserve report.
So, whether you’re looking at traditional banks or smaller institutions, it’s clear that understanding your financing options can make a significant difference in your business’s growth!
Traditional short-term financing options
If you’re unsure about going the traditional loan route, consider exploring a business line of credit. Unlike a loan, a line of credit gives you a predetermined amount you can draw from as needed. A business credit card is another traditional option for short-term financing.
While these options are popular, they typically require a more in-depth application process and proof of a solid credit history. This means your business needs to show a reliable payment track record.
Not-so-traditional short-term financing options
Don’t overlook alternatives like invoice factoring and invoice financing. These methods let businesses with outstanding invoices turn those pending payments into quick cash flow. Surprisingly, many owners aren’t aware these options exist, but they can provide the lifeline your business needs without traditional bank involvement.
Also, asset-based lending allows businesses to use their inventory or retail sales as collateral. A little research can help you uncover these valuable financing options!
Why choose online short-term financing?
Online financing, including invoice factoring, often means you won’t face the lengthy application process typical with traditional lenders. The key criteria for approval are your invoices, customer payment history, and your business’s risk profile.
Once you establish a relationship with an online lender, you might find the turnaround times even quicker, making it easier to get the funds you need when you need them.
Online lenders tend to understand the ebbs and flows of small businesses better. They are more likely to work with you, especially if you’re just starting out or facing a cash flow crunch. One bonus of using asset-based lending is that it won’t impact your business credit history, as these lenders often don’t rely on traditional credit rating bureaus.
Effortless cash flow with Forwardly
If you’re looking to steer clear of traditional financing and streamline your cash flow instead, Forwardly is your best bet! With Forwardly, you can pay your bills right on their due date in under 60 seconds, giving you the flexibility to hold onto your cash longer. With instant payments, you can receive funds faster than with traditional slow payment methods.
And here’s the cherry on top: Forwardly has no monthly subscription fees—bill payments are free! While there is a small fee for receiving payments, you’ll also gain access to a cash flow forecasting tool at no extra cost. This means you can manage your finances with ease and confidence. Say goodbye to the stress of financing and hello to a more efficient way to handle your business’s cash flow!
