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How do you tell whether a short term or a long term business loan is good for your business?
Basically this calls for a certain degree of judgment from you based on some key factors. Prima facie, the first one being, whether it is a new business loan and how big the amount is.
Normally new businesses take time to return on investment extending sometimes to years. However small businesses start returning in a couple of months depending on where the money is used. For example, if the loan is used to buy inventory or machineries and equipments returns can be faster.
Again, loans utilized on other working capital needs pay back quick too depending on the type of business and hoe hard you push it. On the other hand loans used to service old debts and for purchasing real estates will take really longer to return obviously as they are not actually producing.
So, what makes sense to decide whether a short term loan is good for you is by deciding:
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The amount required
Rate of interest (short term loans usually carry higher interest)
Whether yours is a start up or an existing business as start ups have a longer gestation than the existing businesses. It is still better if your business is already making profit and this loan is for working capital or expansion
Whether you have confirmed orders sufficient to serve at least a good portion of the loan. This factor is all the more important as cash flow is projected and you may have already put in place a repayment plan
Whether the profit margin is wide enough to support a short term. Higher margins coupled with regular cash flow is definitely conducive for a short term business loan
If you are servicing an old debt from this loan, it can very well make additional monies available for faster repayments. In this case you can opt for short term loan if the amount is not very big. Bigger loans under this usage may only benefit on a longer term.
The bottom line in decision making process as to whether a short term or a long term business loans benefits you is looking at the benefits over the complete term. See things in the backdrop of whether it saves you from a disaster or it helps grab an opportunity or still whether it creates assets. One final word here is if the loan is required to create assets for your future needs you will invariably choose a long term business loan.
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