Short Term vs Long Term Loan
The main difference between short and long term loans is the time to pay the debt off. As it was mentioned, this term is usually no more than 1 year for short term loans. For long term loans, this period can be up to 25-30 years.
Also, the amount you can borrow in a short term loan is smaller than a long term loan. Generally, you can borrow from $100 up to $100,000. The maximal amount you can borrow is set by each short term loan provider. Hence, it is not a standard value.
A line of credit from a bank is repaid usually through monthly payments. On the other hand, short term debt has to be repaid through weekly payments. As mentioned before, the interests are much higher in short term loans. Moreover, penalties for late payments are also much higher in short term loans.
Contrasting long term loans from a bank, short term loans can be processes extremely faster. A reputable short term loan provider can approve a loan in one day. Moreover, you need fewer documents to apply for a short term loan.
Advantages and Disadvantages
In spite of the high risk of short term loans, they have some advantages that an entrepreneur can benefit from. Some of these advantages are:
- Although the interest rates for short term loans are higher than long term loans, the total amount paid is lower. This is because the repayment term of one year gives less time for incurring interests;
- Short term loans allow planning the immediate business strategy. You can consider that your debt will be paid off within a year and from there you plan on. With a long term debt, you cannot forecast how your business finances will be in 25 years;
- The requirements to get a short term loan are easy to meet. This is perfect for entrepreneurs that do not have an impeccable credit history.
- As mentioned above, the application process for a short term loan can be as short as one day. Hence, these are quick funding options when money is needed urgently;
There are disadvantages too. And they should be taken into account before opting for this financing modality. Some of the disadvantages of short term loans are:
- The amount of money that an entrepreneur can borrow is low. For small businesses, the amount can be enough; but in other cases, it could be insufficient;
- The weekly payments can be a source of problems for businesses with inconsistent revenue. Penalties for late payments are high. So, without consistent revenues, the cost of the short term debt can be very high.
The entrepreneur has to consider both advantages and disadvantages. Long term loans have their advantages and disadvantages too. One of the biggest disadvantages of a long term loan is the stress generated from making monthly payments for so long.
Short Term Loan Requirements
There is little paperwork involved to apply for a short term loan. The different sources of short term funds establish the requirements to apply for a loan. Typically, the requirements are:
- A valid ID issued by the government, with a photo and signature of the holder;
- A bank statement covering the movements of at least the last 3 months;
- Payslips for at least the last 3 months;
- Proof of billing like electricity, water, or internet bills.
Again, different short term loan providers may have different requirements. There is no standard list of requirements.
How to Apply for Short Term Loan?
Submitting an application for a short term loan could not be easier. In most cases, it is done through the Internet. Once you open the website of the loan provider, all you have to do is follow the instructions. You may need to upload scanned copies of some documents.
A credit card is not a requirement for the application. You must have a valid bank account though. More importantly, the applicant does not need a perfect credit history. Short term loan providers will consider the application of entrepreneurs that are still establishing their credit history. But having a good credit history is a plus.
The applicant must have a valid email account and/or mobile phone number. This is necessary to notify whether the loan was approved. The notification can be sent via email, SMS, or a notification app. Sometimes, a direct phone call is used.