Short-term vs. long-term business loans: How to choose

When your business needs funding, applying for a loan is often a natural next step. Deciding between a short-term and a long-term loan can require careful consideration, but understanding the terms associated with each option can make the decision easier.

Short-term loans typically focus on immediate needs, while long-term loans are designed to support ongoing growth. With the right information, you can evaluate and decide which funding option is the best choice for your financial situation and goals. Keep reading to learn more about the differences between short-term and long-term business loans.

What you’ll learn:

• Short-term business loans are often easier to qualify for and faster to fund, but they often come with higher monthly costs.

• Long-term business loans offer larger loan amounts and longer repayment periods, but they tend to be harder to qualify for and may require collateral.

• Choosing the right option for your business depends on your financial needs and objectives.

Several factors will likely come into play when deciding which type of business loan to apply for. Settling on how much funding you need, how quickly you need it and the ideal repayment terms can help you choose the right loan for your business.

Here’s a quick glance at the main differences between short-term and long-term business loans:

A short-term business loan is a type of financing designed to help business owners meet short-term financial needs, like emergency expenses or fluctuations in cash flow. The lender issues the loan amount, which you agree to repay according to the terms they set. The loan application and approval process for short-term business loans are generally easier than for long-term loans, and some online lenders may disburse funds within a day or two.

Repayment terms tend to be stricter with short-term business loans. They’re usually repaid in no more than 18-24 months and may require frequent payments, sometimes as often as daily. The interest rates and other fees associated with short-term business loans can be quite high, depending on the lender and the specific type of loan.

A short-term business loan can help your business out in a pinch, but higher costs and a shorter repayment term may make it less suitable for some businesses.

These are some advantages of short-term business loans:

• Relatively easy financial requirements: Short-term business loans may be available to newer businesses or those with lower credit scores.

• Quick access to funds: Online lenders, in particular, may issue funds within 24 hours.

• Often no need for collateral: Short-term loans are frequently unsecured, allowing you the option to forgo collateral.

And these are some possible disadvantages:

• Higher interest rates and fees: Short-term business loans generally have higher interest rates and additional fees, which can increase the overall cost of borrowing.

• Less money available: Short-term business loans often have low maximum loan amounts compared to long-term business loans, which may offer funding in the millions.

• Fast repayment timeline: Business owners generally have to repay their short-term business loans within six to 24 months.

Some options for short-term business financing include:

• Business line of credit: A business line of credit allows you to borrow funds up to a set limit. As you repay what you borrow, those funds become available to use again. Depending on the lender and whether you want a secured or unsecured business line of credit, you may have to offer collateral to qualify.

• Invoice factoring: With this short-term financing method, businesses sell their unpaid invoices to a factoring company. The company pays the bulk of the invoices up front, which can help improve cash flow, though associated fees reduce the total amount the business ultimately receives.

• Merchant cash advance (MCA): With an MCA, a lender loans you a lump sum of money that’s repaid using a portion of your future credit card sales until the advance is paid in full. MCAs are one of the most expensive short-term financing options.

Long-term business loans are typically intended for larger loan amounts and can be repaid over a longer period of time—usually at least five years. With many long-term business loans, you may need to provide some form of collateral in exchange for the funds. This collateral is often the asset being financed, like equipment or real estate.

The application and approval process is typically more rigorous for long-term business loans than for short-term business loans, meaning your business generally needs to be in strong financial standing to qualify. If approved, the larger loan amounts can be used for capital expenditures or to refinance existing debt. 

Compared to short-term business loans, long-term business loans typically offer low interest rates and monthly payments. Depending on the specific loan type, you may even be able to extend the repayment period to more than 10 years.

A long-term business loan can help support business growth, but it also involves a relatively long-term financial commitment.

Advantages of long-term business loans include:

• More available funding: Long-term business loans can offer larger loan amounts, sometimes up to $5 million.

• A long repayment timeline: Depending on the specific loan type and lender, a long-term business loan may have a repayment term of as few as five years, while another loan may offer a term of up to 20 or even 25 years.

• Lower interest rates and fees: Compared to short-term business loans, long-term business loans usually have low interest rates and fees.

Possible disadvantages include:

• Tougher financial requirements: Long-term business loans may have higher minimum credit score and revenue requirements, making them less accessible than short-term business loans.

• Expense in the long run: Although monthly payments may be lower, interest can add up over time, potentially resulting in a higher total repayment amount than a comparable short-term business loan.

• A collateral requirement: Long-term business loans often require collateral, such as real estate, which could be seized if you’re unable to repay the loan.

Some mid-to-long-term business loan options include:

• SBA 7(a) loans: The SBA 7(a), the primary loan program of the U.S. Small Business Administration (SBA), allows lenders to issue loans of up to $5 million. Repayment terms vary by use of funds and can extend up to five years for working capital, and up to 25 years for real estate, with an extension possible. 

• Term loans: A more affordable type of small-business loan, term loans generally feature fixed interest rates and monthly payments. Loan amounts can range from $5,000 to $5 million, with repayment terms that generally may extend up to seven years and could extend even longer, depending on the lender and loan purpose. In some cases, though, a term loan can have a repayment period lasting as few as six months.

• Commercial real estate (CRE) loans: CRE loans are mortgages on commercial properties, secured by a lien. Their repayment terms can range from five to 20 years, with interest rates generally higher than rates on residential mortgages.

Choosing between a short-term and a long-term business loan depends on your business’s financial situation. If you need a moderate amount of funding to meet an immediate need, a short-term business loan may be the better option. If you’re looking for a larger amount of funding for a significant purchase, a long-term business loan may be more suitable.

Beyond assessing which type of loan best fits your needs, it also helps to consider each loan type’s respective terms. Short-term business loans are generally easier to qualify for and may require no collateral or less collateral than long-term business loans. Meanwhile, long-term business loans normally offer longer repayment terms and lower interest rates. Understanding how each loan type works can help you determine which option your business is best equipped to repay on schedule.

The right business loan can help you overcome financial challenges or support business growth, but when mismanaged, it can also create unnecessary financial strain. Understanding your loan options and being honest about your business’s financial outlook can help you choose a funding solution that aligns with your needs and repayment ability.

Choosing between short-term and long-term business loans often comes down to finding a balance between loan terms, repayment timelines and costs that work for your business. Carefully considering how quickly you may need the funds and how comfortably you can repay them can help you make a more sustainable borrowing decision.

But there are other funding options for small businesses, too. Compare Capital One business credit cards and get pre-approved today—with no impact on your credit score.