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When you are running a small business, choosing whether to pursue short-term debt vs. long-term debt to achieve your business goals could be a critical decision, as there are pros and cons to both forms of debt.
At Business Funding Group (BFG), we are experts in small business financing and can help you understand how each form of debt works and when to use it. We offer a free 15-minute call to discuss the type of financing that may be best for your specific situation.
Short-term debt is when a small business takes a loan or owes money that must be paid back within a year or less. These debts are typically listed under current liabilities in a business’s balance sheet.
There are several forms of short-term debt, such as short-term loans to cover expenses or to fund a purchase. The creditor will specify the exact date by which the loan must be repaid.
For example, a Merchant Cash Advance (MCA) is often paid daily or weekly for a period of a few months to a year. An MCA offers a business the convenience of an upfront sum of cash in exchange for repayments based on a percentage of future credit or debit card sales.
Another example of short-term debt is factoring. This is when a business sells its unpaid invoices to a third party for an immediate influx of cash. Small businesses may also carry balances on lines of credit that allow for flexible spending and quick access to funds.
Other examples of short-term debt include:
Short-term debt is usually easily accessible and can be helpful when small businesses need quick cash to cover expenses, such as inventory or payroll, while waiting for receivables.
The downside to short-term debt is higher interest rates and fees. However, it may be a smart business move for you to leverage short-term debt—rather than long-term debt—to solve short-term problems and meet your goals if the convenience of getting the funds quickly outweighs the cost.
In contrast to short-term debt, long-term debt is business financing that has repayment periods of longer than one year—helping you to achieve your bigger goals. Depending on the type of loan, the repayment period can be as long as 30 years.
Small Business Administration (SBA) loans are an example of long-term debt that can be beneficial to small businesses. SBA loans offer:
Successful business owners typically think long-term, and business debt is no exception. Long-term debt is more sustainable and gives an owner the ability to grow their business without taking on the high interest rates and fees associated with short-term debt.
Long-term debt could even be used to refinance short-term debt. This involves consolidating expensive short-term loans into one monthly payment that is typically more manageable.
Choosing the right type of financing—whether you opt for short-term debt vs. long-term debt to achieve your business goals—has the power to help you expand your business in a financially sound way.
BFG is a loan packaging firm with expertise in using debt to fuel business growth. We offer a free 15-minute phone call to discuss your eligibility for a small business loan, what you need financing for, and whether short-term or long-term debt would be better suited for you. We could also help you through the entire process, from application to closing. Contact us.
(917) 593-5013