If you are a small business and looking for funding, you are likely going to come across phrases like “short-term finance” or “long-term finance”.  But what exactly does that mean?  When do you use each? In short, short-term financing supports the company’s day-to-day activities.  Long-term financing typically funds fixed assets. Here are key differences between short-term and long-term financing:

  • Repayment terms: The most obvious difference between the two types of financing is long-term financing has longer repayment terms. Short-term financing usually has repayment terms of 18 months or less. Long-term finance will have repayment terms of more than 18 months and even as long as 10 or 20 years.

  • Purposes: Short-term finance is typically used for working capital and other immediate needs, such as payroll, inventory, supply POs or everyday operational costs.  Long-term finance, on the other hand, is often used for bigger purchases and projects, such as renovations, real estate purchases, buying a business, major equipment, etc.

  • Cost: Although the true difference between these financing types lies in repayment terms, it is worth mentioning that short-term financing generally has higher interest rates.  However, long-term financing has more affordable interest rates, but the total interest paid is over a longer repayment term so it is higher.

  • Application process and funding time: On the whole, short-term finance will have more lenient requirements, a simpler application process, and faster funding times. Long-term financing has greater eligibility requirements, a more involved application process, and longer funding times.

In conclusion, it is really important to match sources and uses of funds.  If you’re looking for short-term financing because you want access to fast cash, or because you can’t qualify for long-term financing, it’s important to remember that the only guaranteed feature of short-term finance will be the shorter repayment terms.  Long-term financing provides stability to fulfill long-term capital investment needs for the company.  When funds are optimally utilized, the company will grow and flourish in the long-run.