Short Term vs Long Term Business Loans: What’s Best?

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• Whether youre just starting out or youre trying
  to grow your business by taking advantage of a
  market opportunity, there are many business
  ?nancing options available.
• Small business loans can help entrepreneurs
  navigate challenges and invest in business
  expansion. But with many loan types available, it
  can feel overwhelming to determine whats right
  for your business.
• There are bene?ts to both short-term and
  long-term business loans, as well as drawbacks.
  The right loan for your business really depends
  on your unique situation. More common short-term
  business loans include working capital loans,
  while long-term loans tend to be term loans.
• Each may be right for your business, but our
  business loan comparison will help you assess
  working capital vs. term loans before making a
  decision.
• In this article
• Learn the basics of small business lending,
  including different types of working capital
  loans and term loans.
• Explore the pros and cons of working capital
  loans.
• Explore the pros and cons of term loans.

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• The basics of small business lending
• Small businesses have access to a wide variety of
  ?nancing options. Traditional banks, credit
  unions, and online lenders offer many loan
  products designed for different business
  purposes.
• Provided a small business owner has a strong
  personal credit score and the business has a
  proven ?nancial track record, it should be
  possible to get approved for a loan with
  favorable terms.
• (Even entrepreneurs with poor credit can still
  access bad credit business loans, although they
  may have to pay higher interest rates or put up
  more collateral.)
• Small business lending and the overall loan
  process have evolved with the advent of
  automation and stronger digital lending tools.
• Ultimately, the process has become much easier
  for borrowers. Using digital lending platforms
  and real-time apps, borrowers can calculate loan
  payments and predict pro?tability before they
  even reach out to a lender.
• Difference Between Working Capital Loans and Term
  Loans
• A business loan comparison should always be the
  ?rst step when youre considering applying for
  ?nancing. When it comes to working capital loans
  vs. term loans, there are a number of key
  differences. These include
• Usage Working capital loans are typically used
  to fund day-to-day business operations, and may
  have either revolving or non-revolving funds
  available. Term loans are lump sum payments that
  businesses typically use to ?nance long-term
  investments, like business acquisitions or
  growth activities like hiring.
• Repayment periods Working capital loans tend to
  have shorter repayment periods, sometimes with
  terms as short as daily payments. Term loans tend
  to have repayment periods of several years.
• Interest rates Since they have faster repayment
  windows, working capital loans often have higher
  interest rates than term loans.
• Collateral Working capital loans are typically
  unsecured, while term loans often require
  collateral to secure the loan against default.
• There may be many more small differences between
  working capital loans vs. term loans depending
  on your lender and business loan type, but these
  are the core factors to note.

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• Basically, working capital loans are designed to
  increase cash ?ow and ?nance short-term and
  day-to-day business needs, while term loans are
  typically used with a longer term in mind.
• Types of Working Capital Loans Financing
• Working capital loans describe any type of small
  business loan that provides smaller amounts of
  capital quickly. There are several types of
  working capital loans and there are other
  ?nancing options that are not loans but help
  business owners secure working capital they need
  to run their operations day to day.
• Lets start with two options that are not loans,
  but which can be useful for business owners that
  need working capital in their business
• Working Capital Loan
• A working capital loan is a type of loan that
  provides a short-term cash infusion for a
  business that needs a ?nancing solution for their
  day to day operations and current liabilities
  such as recurring payments or large invoices.
• These loans are often provided through a service
  provider that is familiar with a businesss
  operations and knows what is required to make a
  full repayment of the loan.
• For example, many online payments companies will
  offer working capital loans to their clients
  because they can see all of the payments that
  these businesses are receiving and will have
  con?dence to provide capital on the strength of
  that revenue history.
• SBA CAPLines and Working Capital Loans
• The U.S. Small Business Administration (SBA)
  provides working capital options, as well as
  term loans, with lower down payments and lower
  interest rates than traditional sources of
  funding because a portion of each loan is
  guaranteed by the SBA.
• The CAPLines program offers several types working
  capital lines of credit for small businesses
• Seasonal CAPLine
• Contract CAPLine
• Builders CAPLine
• Working CAPLine

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The SBA also began processing working capital
loans through the 7(a) loan program in August
2024, providing small businesses with another
short-term business loan option. This program is
still in its early stages, so check back in the
future for more details about how it works and
how you may be able to qualify. Invoice Financing
/ Factoring Invoice ?nancing, sometimes called
invoice factoring, is an alternative ?nancing
option that lets small business owners receive
cash immediately for unpaid invoices. An invoice
factoring agent purchases the invoices, collects
for them, and sends the balance to the business,
less fees, which are calculated using a
predetermined factor rate. For instance, if a
creative agency has an urgent need to purchase
new computers for its staff members, it could
get a quick in?ux of money through invoice
factoring to purchase the computers and increase
productivity. Merchant Cash Advance A merchant
cash advance (MCA) is a ?nancing arrangement for
any business that accepts debit or credit card
payments through a point of sale (POS) system. To
be clear, much like invoice factoring a merchant
cash advance is not a loan. The borrower repays
the advance with weekly or monthly payments based
on an agreed- upon percentage of sales. If sales
go up, the payment will come in a little bit
higher. If sales go down, the payment can come in
a little bit lower, proportionally. Essentially,
its trading future revenues for the bene?t of
having more cash now. Business Line of Credit A
business line of credit is a type of revolving
credit that is something of a cross between a
business credit card and a business loan.
compared to taking out a business credit card.
Interest is charged only on the amount of credit
the small business has withdrawn. Lines of credit
are a great way for new business owners to
increase cash ?ow while building credit history
which can open more business ?nancing options in
the future. Pros and Cons of Working Capital
Loans There are several bene?ts to securing a
working capital. The most common reasons
entrepreneurs turn to working capital loans over
traditional lending tools include the following
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• Timing The process from application to funding
  is much faster with working capital loans than
  with traditional bank loans.
• Approval The approval odds for small business
  owners applying for working capital loans are
  better than most long-term loans. Some ?nancing
  arrangements do not require a credit check or
  require a low minimum credit score for approval.
  Borrowers can check their creditworthiness using
  annualcreditreport.com.
• Convenience Most working capital lenders offer
  online applications, underwriting processes, and
  fast funding. When Satinda Sharma, of Brick Lane
  Curry House, worked with Biz2Credit to secure a
  business line of credit, he was impressed with
  the easy-to-use, real-time, lending software and
  pleasant customer experience.
• Disadvantages to working capital loans including
  shorter lifecycles and higher ?nancing costs.
  While they are a great lending solution for
  business owners planning to fund a start- up or
  cover a large purchase, they often have higher
  interest rates than term loans.
• Types of Term Loans
• A term loan is a traditional type of business
  ?nancing. Term loans can be secured, where
  collateral is required, or unsecured, where the
  borrowers credit and ?nancial pro?le secures
  the funds. First-time borrowers or those with bad
  credit can secure lower interest rates by
  choosing a secured term loan.
• Term loans may be offered by banks, credit
  unions, and online lenders, many of which offer
  SBA term loans, like the popular 7(a) term loan
  program. Term loans vary in their conditions
  between lenders, most often
• Interest rates
• Repayment periods
• Collateral requirements
• Pros and Cons of Term Loans
• Like any business loan type, term loans have
  advantages and disadvantages. Some of the
  primary term loan bene?ts include
• Flexibility A term loan can provide the capital
  necessary to cover unexpected operating costs,
  while not impacting the amount of funds available
  for operating expenses, like payroll, utility
  bills, and lease obligations.

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• Improving business credit Taking out a term loan
  helps new business owners build good business
  credit. Business credit scores are reported by
  three major credit bureaus including Experian,
  Dun and Bradstreet, and Equifax.
• Income tax savings The interest portion of a
  term loan payment quali?es as a business tax
  deduction for most business owners, so they can
  decrease the overall tax liability and may even
  result in an income tax refund for the business.
• Large maximums and long repayment periods Term
  loans often have higher maximum loan amounts,
  making them better options for major business
  growth initiatives that you expect will take
  several years to see through.
• Its not all positive, however. Term loans carry
  more risk than working capital loans, as theyre
  often for higher amounts and keep your business
  in debt longer.
• Defaulting on a term loan or falling short on
  monthly payments can have a signi?cant impact on
  both the businesss credit and the owners
  personal credit score. Likewise, its debt that
  youll have to account for and make payments on
  every month, even if youve already spent the
  funds.
• Are Working Capital Loans or Term Loans Better?
• The question isnt so much which of working
  capital vs. term loans is better, but which is
  better for your business. Every small business is
  at a different stage, in a different industry,
  and has different goals. Whats better for one
  business may not necessarily be better for
  another.
• Working capital loans tend to be better for small
  businesses with short-term goals, and that plan
  to use the money to increase cash ?ow and cover
  day-to-day operating expenses and support
  everyday business activities and current assets.
• Term loans tend to be better for small businesses
  ready to invest in long-term growth that need a
  large amount of money to acquire business assets,
  launch new products, or hire more people.
  Businesses that need the ?exibility to pump money
  into the business now and pay it back over
  several years will ?nd term loans are better
  suited to their needs.
• An essential part of the decision-making process
  is to consider the advantages and disadvantages
  of borrowing funds. Loans impact the businesss
  credit history and monthly cash?ows.

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Business owners should be con?dent that their
decision to borrow funds will ?t into the
long-term business plan and help the owner meet
monthly and annual benchmarks. Working with a
lender and exploring different types of loans is
the best way to understand the long-term effects
of ?nancing for your business. Conclusion Working
capital loans and term loans are both great
solutions for business owners looking to get
started, expand, or navigate periods of
inconsistent cash?ows. working capital ?nancing,
like invoice factoring and merchant cash
advances, may be better for entrepreneurs that
are just starting out or have had some negative
business credit activity and are seeking a
short-term solution. Term loans offer a
longer-term, more affordable option for
established business owners. Either option may
be a quality business funding solution for your
small business. To discover which type of
business ?nancing is right, is to explore the
lending options available at Biz2Credit. FAQs Wha
t are working capital loans vs. term
loans? Working capital loans are short-term loans
that help a business increase cash ?ow and
day-to-day operational expenses. They tend to
have short repayment terms and lower eligibility
requirements than term loans, which are lump sum
payments upfront with longer repayment schedules
designed to help small businesses invest in
expansion and growth. Are working capital loans
or term loans better? Understanding if working
capital vs. term loans would be better comes down
to your businesss unique needs. If you just
need help navigating cash ?ow gaps like a
seasonal lull in business or support day-to-day
operations, a working capital loan is a more
?exible option to pump some liquidity into the
business and cover working capital needs without
taking on signi?cant debt. If your business has
more than simply operational needs, like a
desire to acquire real estate or grow
aggressively, the longer repayment periods and
higher maximums of a term loan will be better
for your business.