written by | December 26, 2022

The Difference Between Short Term And Long Term Business Loans

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Table of Content


A business loan is a loan that is specifically intended for business purposes. Business loans can be used for various purposes, including start-up financing, business expansion, equipment purchases, working capital, etc. Business loans can be difficult to obtain, especially for small businesses. However, several options are available, including government-backed and private loans from banks and other financial institutions. If you are looking for a business loan, it is important to compare your options and choose the best loan.

Did you know?A secured business loan is when the individual provides collateral in the form of land, machinery, a house, etc, as security for the loan amount. 

What Is a Business Loan?

Business loans may be important to launching a startup or expanding a current company, with budget regularly used to relax inventory, buy equipment, hire operational space, rent personnel or cowl a host of other charges. but, enterprise loans may be difficult for new businesses to get.

Short-Term Business Loan

Short-term business loans allow businesses to borrow money for a short period, usually up to 12 months. These loans can be used for various purposes, such as working capital, inventory, or equipment purchases.

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Important Components For Short-Term Business Loan

Short-term business loans typically have higher interest rates than long-term loans, but they can be a good option for businesses that need funding quickly. Many online lenders offer short-term business loans, so it's important to compare options to find the best rate.

Purpose Of Loan 

A business loan in India is typically used for working capital needs or financing business operations. The loan amount can be used for various purposes, such as inventory, payroll, or other business expenses. The loan repayment period is generally between 3 and 36 months. Interest rates on short-term business loans in India are typically higher than long-term loans, but the loan terms are shorter, making them a good option for businesses with strong cash flow. Short-term business loans can be used for various purposes, including working capital, inventory, equipment, and expansion..

Duration Of Loan

An average duration of a short-term business loan in India is around 2 to 3 years. However, each loan's specific terms and conditions will vary depending on the lender. Some lenders may offer loans with repayment terms as short as 6 months, while others may extend the loan duration up to 5 years.

It is important to compare the terms and conditions of different loans before choosing one. The main factor determining a loan's duration is its repayment schedule. For example, a loan with weekly repayments will have a shorter duration than a loan with monthly repayments. 

The interest rate and fees also play a role in determining the length of the loan. In India, the duration of a short-term business loan can range from a few weeks to a few years. The interest rate and fees will vary depending on the lender and the type of loan. It is important to shop around and compare loans before choosing one.

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Need For Collateral

Without collateral, short-term business loans in India can be challenging to obtain. However, several lenders will offer such loans without the need for collateral. The interest rates on these loans are typically higher than those secured by collateral. Still, they can be a good option for businesses that need the necessary collateral to secure a loan.

In addition, short-term business loans can provide working capital for businesses that may not be eligible for traditional bank loans. However, the disadvantage of a short-term business loan is that it generally has a higher interest rate than a long-term loan.

Interest Rate And Document

The interest rate for short-term business loans in India can vary depending on the lender but is typically between 10-15%. Short-term business loans are usually used for working capital or other immediate business needs and have terms of 1-2 years.

There are a few documents required for short-term business loans in India. The first and most important document is the business loan application form. This form will need to be filled out and submitted to the lender. The next document required is the business plan. This document will need to be created to get the loan approved. The last document required is the collateral. This can be in the form of property, equity, or other assets.

Long-Term Business Loan 

A long-term business loan is a type of financing that helps businesses secure the capital they need to expand, make major purchases, or finance other long-term projects. Long-term loans typically have terms of five years or more and can be either secured or unsecured. For businesses that are looking to grow and invest in their future, a long-term loan can be a great option. 

The extra time that a long-term loan provides can give businesses the flexibility to invest in long-term projects or take advantage of opportunities that might not be possible with a shorter-term loan. 

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Important Components For Long-Term Business Loan 

Long-term loans also come with some risks. Because they are typically larger loans, the monthly payments can be more difficult for some businesses to manage. And if a business cannot repay the loan, it may face serious financial consequences, including the loss of assets. 

Purpose Of Loan 

Long-term business loans are typically used for significant investments or expansion projects, such as opening a new facility, purchasing equipment, or expanding into new markets. The terms of these loans are usually longer than other business loans, giving borrowers more time to repay the loan. Long-term business loans can also consolidate multiple shorter-term loans into one loan with a lower interest rate. This can save business owners money on interest payments over time. Long-term business loans can also be used to finance the purchase of new equipment or property or to expand a business.

Duration Of Loan

There is no single answer to the question of how long a long-term business loan might last in India, as the terms of such loans can vary significantly from one lender to the next. However, it is common for long-term business loans in India to have repayment terms that extend for several years. In general, though, most long-term business loans in India will have a repayment period of anywhere from two to seven years.

Need For Collateral

For a business to be eligible for a long-term loan in India, it must have some form of collateral. This collateral can be in the property, equipment, or stock condition. The collateral is used to secure the loan, and if the business cannot repay the loan, the lender can seize the collateral to recoup their losses. While collateral is not required for all types of loans, it is typically required for long-term loans. The reason collateral is typically required for long-term loans is that these loans are considered to be higher risk. 

Collateral can protect the lender against loss if the borrower defaults on the loan. In some cases, the collateral may even be worth more than the loan itself, providing the lender with a cushion in the event of a default. Lenders must carefully consider the risks involved before deciding whether or not to require collateral for a long-term loan.

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Interest Rate And Documentation

The interest rate of long-term business loans in India varies depending on the type of loan, the lender, the borrower's creditworthiness, and other factors. However, interest rates on long-term business loans in India typically range from 10% to 25%. 

The actual rate depends on several factors, including the type of business, the size of the loan, the repayment schedule, and the borrower's creditworthiness. Generally, the interest rate on a long-term loan is higher than the rate on a short-term loan.

The following documents are required for long-term business loans in India: 

1. Business Plan: 

The plan should include the company's financial projections for the next three to five years.

 2. Financial Statements: 

These statements will give the lender an idea of the company's financial health and ability to repay the loan. 

3. Tax Returns: 

This document will show the lender how much money the company has made and will help to assess the company's financial stability. 

4. Collateral: 

Many lenders will require collateral for a long-term loan. Collateral can be in the form of property, equipment, or even accounts receivable. 

5. Personal Guarantee: 

This guarantee means that the owners are personally responsible for repaying the loan if the company cannot do so.

Conclusion

In the case of applying for small business financing, it's important to understand what information small business lenders need from you so you can gather the appropriate documents. The main advantage of a short-term business loan is that it can be obtained quickly and without collateral. For businesses considering a long-term loan, it's important to consider the risks and benefits before deciding.

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FAQs

Q: What are the disadvantages of short-term business loans?

Ans:

These are the disadvantages of short-term business loans -

  • The interest rates on short-term loans are often higher than on other types of loans. 
  • Short-term loans often have shorter repayment terms, which can make them more difficult to repay 
  • There is always the risk that the borrower will be unable to repay the loan, which could lead to default and damage the business's credit rating.

Q: What are the benefits of short-term business loans?

Ans:

There are many benefits of short-term business loans. Some of the most notable benefits include:

  • They can provide the funds that a business needs to grow or expand.
  • They can be used to finance the working capital requirements of a business. 
  • They can be used to cover unexpected or one-time expenses.

Q: How do short-term business loans work?

Ans:

Short-term business loans work the same way as any other type of loan. The borrower applies for the loan and, if approved, receives the funds from the lender. The borrower then repays the loan, with interest, over the agreed- repayment period.

Q: What are the risks of long-term business loans in India?

Ans:

As with any loan, there is always the risk that a borrower will default on the loan. This could lead to collateral loss or the business being forced into bankruptcy. Long-term business loans also tend to have higher interest rates than shorter-term loans, which could make them more expensive in the long run.

Q: What are the benefits of long-term business loans in India?

Ans:

Long-term loans can benefit businesses that need to make a major purchase but may not have the upfront capital. These loans can also help manage cash flow, allowing businesses to spread out the cost of a large expense over a longer period.

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The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.
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Disclaimer :
The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.