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Difference Between Short-Term & Long-Term Business Loans


Tenor – A term that not only defines the duration of a loan but also its purpose. Predominantly differentiated under the short term and long term brackets, the former incurs a higher interest rate as compared to the latter.

Invariably speaking, the volume of investment also plays a crucial factor in deciding between these two alternatives. While immediate cash flow needs may ask a business to opt for short-term loans, an extensive investment plan, on the other hand, may demand the other option.

However, prior to availing a loan, it is imperative to understand the intricacies and application areas of both alternatives as has been laid down in the following section.

Short-term Business Loan

A short-term business loan comes with tenures ranging from 12 up to 96 months. The average interest rates for these loans start from around 18% while the financing available ranges up to Rs.30 Lakh.
Few types of short-term business loans that banks and NBFCs provide include:

I.        Machinery Loan

Looking to revamp your in-house equipment and inventory? Then a machinery loan can come to your aid. Expand your venture capabilities using a machinery loan and escalate your production standards manifold.

II.      Working Capital Loan

A working capital loan addresses the daily financial needs of a business. Consolidating debts, restocking inventory, paying wages, and others can be the ideal use of this loan.

III.    Business Loans for Women

Good and reliable NBFCs like Bajaj Finserv provide tailor-made loans to women to address their entrepreneurship needs.

The short-term businesses mentioned above don’t require any collateral and thus can be availed without hypothecating or mortgaging an asset.

Long-Term Business Loans

A long-term business loan can have a tenure that lasts for more than a decade. They have lower rates of interest and provide high financing options. However, borrowers end up paying more interest on long-term loans owing to their extended tenures when compared to short-term loans.

However, business owners can save on taxes with long-term business loans. The interest paid on these loans is tax deductible and thus, can help one retain some funds for their business.

Criterions to be fulfilled for availing these loans:

Presently every short term and long term business loan requires same criteria –

       Applicants need to be with the ages of 22 to 55 years.
       The business should have a vintage of at least 3 years.
       Lenders need to have their last year’s business turnover audited by a CA.
       They also have to file income tax returns for their business for at least the previous year.

In addition to the above, individuals applying for these loans also need to hold a good credit score. Banks and NBFCs require a borrower to have a credit score of at least 750 or more.

Documents required:

Financial institutions need the following documents from borrowers -  

       KYC documents.
       Business proof with a valid certificate.
       Bank account statement.
       Other relevant financial documents.

The differences between a short-term business loan and long-term business loan are great.     Depending on the nature of the requirement, individuals need to make a decision which business loan to apply for.

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