Business
Is a Long-Term Loan Better for Your Business?
The average cost to start and operate a business in the U.S. for one year ranges from $30,000 to $40,000. However, that can go up to a few hundred thousand, even millions, depending on the industry.
Those figures may have made you wonder if you could afford to start or maintain a business. The good news is that you can, with the help of a long-term loan.
To that end, we created this guide on when long-term loans make more sense than short-term, quick cash loans. So keep reading to discover when the former is a better, more practical choice.
You Want Lower Monthly Loan Payments
The “term” of a term loan dictates the number of months you have to repay what you borrow, plus interest and other fees. Therefore, your monthly payment depends on the loan’s total cost and term. In most cases, the longer the term or repayment period of a loan, the lower the required monthly payment.
So, a long-term loan may make more sense if you need a loan requiring lower monthly payments.
For example, suppose you need a $35,000 loan but can only afford to pay $1,000 toward it every month. Let’s also say you can apply for a loan with an annual interest rate of 8% and terms of 1 to 4 years.
If you opt for a 1-year term, your total loan cost will be $37,800, provided the lender won’t impose other fees. That will also bring your monthly payment to $3,150, which is way above your budget.
If you go with the longer 4-year term, your loan will cost $46,200. However, since you have 48 months to repay the loan, your monthly payment will only be $962.50. Since that’s within your budget, it may make for a more practical choice than the shorter 1-year term loan.
You Need a Large Loan
A car purchase is an example of a significant expense for which you may need a long-term small business loan. So you know, the average transaction price of new vehicles in the U.S. in June 2022 reached $48,083. On top of that is the cost of commercial auto insurance, which can be in the thousands of dollars.
Long-term business loans may make more sense than short-term loans for such expenses.
One reason is that lenders are often more likely to issue heftier amounts in exchange for a longer term. After all, they’re taking on a more significant risk by lending more money.
To compensate for that, they want longer terms, which come with more interest payments. Therefore, they can increase their profits, making them more inclined to approve applications. As a result, you may also find it easier to qualify for a heftier amount if you opt for a longer-term loan.
Borrow More With a Long-Term Loan
And there you have it, your guide on when a long-term loan is better for your business. Now you know it’s better than a short-term loan if you want lower monthly payments or need a heftier amount.
On the other hand, it may be best to stick to a short-term one if you only need to borrow a small amount. Just be sure you can pay it back in full and on time.
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Kenneth is a proud native of sydney, born and raised there. However, he pursued his education abroad and studied in Australia. Kenneth has worked as a journalist for almost a decade, making valuable contributions to prominent publications such as Yahoo News and The Verge. Currently, he serves as a journalist for The Hear Up, where he focuses on covering climate and science news. You can reach Kenneth at [email protected].
