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The Difference Between Long-Term And Short-Term Business Loans

A business loan is a type of loan which is taken by businesses/entities or companies to fulfill their intended goals to expand their business values including business expansion, funding, financing, purchasing capacity, equipment expansion working capital, etc. Availing of a business loan sometimes gets harder, especially for small businesses.

The Difference Between Long-Term And Short-Term Business Loans

A business loan is a type of loan which is taken by businesses/entities or companies to fulfill their intended goals to expand their business values including business expansion, funding, financing, purchasing capacity, equipment expansion working capital, etc. Availing of a business loan sometimes gets harder, especially for small businesses. Although people usually seem perplexed when it comes to choosing a business loan for them due to a lack of proper guidance or knowledge. If you are seeking a business loan, it is very essential to analyze & compare the available options for choosing the best loan for you. The following are key differences between short-term business loans & long-term business loans that you must know before taking the final step. So grab your cup of tea and read on!

Long-Term Business Loan

A long-term loan is a type of loan taken by businesses/entities to expand their capital, make changes, and other critical finance-related goals. Long-term loans generally have a period of 5 years or more for repayment. However, It can be secured and unsecured. Long-term loans are suitable for businesses that want to avail of larger amounts as it becomes easy to pay the loan in EMIs.Long-term loans are sounder and better than the short-term loans preferred by borrowers.

Important Elements of Long-term Loans

Long-term loans are also riskier and come with certain consequences. Because they are usually larger loans, the monthly payments of the loan can be a bit hard for some businesses to manage. And if a company/business or entity fails to repay the amount of the loan, then they might have may some serious financial impacts, regarding the loss of assets. Duration of Loan - There is no fixed period of loan payment in India. The terms of a long-term loan can be distinct from one lender to another. However, the duration of loan payments can be extended in some situations in India. Typically, long-term business loan in India has a repayment period of 3 to 6 years. Purposes of Taking a Long-Term Loan - Long-term business loans are taken for major investments or expanding the projects, such as providing a new facility, purchasing supplies, or expanding into new markets. The terms of these loans are usually longer than other business loans, which provides more time for the borrowers to repay the loan. Long-term loans can converge numerous shorter-term loans into lower-interest-rate loans. This can save business owners money on interest payments with time. Long-term business loans can also be used to finance the purchase of new equipment or property or to expand a business. Presenting Valuable Auxiliary - A business needs to present an auxiliary thing while applying for a long-term business loan. This Auxiliary can include such property, equipment, or stock. The auxiliary is utilized to secure the loan, and if the business can not repay the loan, the lender can take the valuable things to fill in the loss. However, presenting an auxiliary is not essential for all types of loans (Required for long-term loans). The reason auxiliaries are required for long-term loans is to be at higher risk. Interest Rate - The interest rate of long-term business loans is distinctive in India based on the type of lender, the loan, the borrower's credit, and other aspects. However, interest rates on long-term business loans range from 10% to 25% in India. The exact rate relies on several factors, containing the type of business, the amount of the loan, the repayment schedule, etc.

Required Documents

Financial Statment - Financial statements give an overview of the company's financial position and capacity to repay the loan. Business Plan - The business plan should contain the company's financial goals & purpose for the next 3 to 5 years. Tax Returns - This document gives the lender how much money the company has generated and assesses the company's financial stability. Auxiliaries - Many lenders would ask for the auxiliary pertinent to a long-term loan. Auxiliary can include property, equipment, etc. Personal Guarantee - This guarantee ensures that the owners would be personally responsible for making the repayment of the loan if the company can not do so.

Short-term Business Loan

Short-term business loans are the type of loans in that businesses borrow money for a short duration, generally up to 12 months. These loans are used for different goals, such as working capital, inventory, or equipment expansion. Important Elements of Short-term Loans Short-term loans ‘in general’ have higher interest rates than long-term business loans, but they can be a good way for businesses to seek funding fast. Major online lenders provide short-term business loans in India, so it's essential to analyze & compare all of the options to find the best loan for your requirement. Duration of Short-term Loan - The average tenure of a short-term loan is up to two to three years. However, every loan has different terms and conditions that varies based on the loan provider. Some loan providers may propose loans with repayment duration as short as 6 months, and on other hand, some may raise it up to 5 years. Therefore, It is very essential to compare the conditions of various loans before making the final selection. The primary factor specifying a loan's duration is the repayment schedule. For instance, a loan with monthly repayments will have less duration than a loan with yearly repayment conditions. Moreover, interest rates and fees also are major elements that measure the role in defining the duration of the loan. The duration of a short-term loan In India can range from a few weeks to a few years. Therefore, it is recommended to compare all of the loans available in the market to select the best for you. Purposes of Taking a Short-Term Loan - A business loan is used for fulfilling capital requirements or financing business operations. The loan amount can be taken for different goals, such as payroll, inventory, or other business expenditures. The loan repayment duration is typically between 3 months to 3 years. The rate of Interest on short-term loans is more heightened than on long-term loans. Short-term business loans can be taken for different goals, containing the capital, inventory, equipment, and expansion. Presenting Valuable Auxiliary - Presenting an auxiliary to take a short-term loan is very essential in India. Short-term business loans can be difficult to acquire in India. Therefore, some lenders will provide these types of loans without any auxiliary. The interest rates on such loans are generally higher than those secured by auxiliaries. Interest Rates - The interest rate for short-term business loans varies based on the loan provider in India but is generally between 10%-15%. Short-term business loans are mostly considered for working capital or other quick business requirements which may have a duration of 1-2 years. Documentation - The first and foremost document is the business loan application form. This application form will require to be filled out and furnished to the loan providers. The subsequent document is the business plan for the upcoming years. This document is to be furnished for the grant of the loan approval. The last document is the auxiliary which can be in the form of property, equity, or other.

Difference between short-term and long-term loans in table form

Elements Short-term loan long-term loan Loan duration This type of loan is generally issued with 2 to 7 years of tenure In this type of loan, duration is generally more than 5 years which can be extended up to 30 years. Interest rate Loan providers charge higher interest rates in short-term business loans. The long-term business loan has a lower interest rate due to the long tenure EMI Short-term loan has a higher EMI payment due to having lower tenure for repayment. The EMI payment in a long-term loan is shorter than in a short-term loan Allotment speed A Short-term loan is allotted in the least possible time for smaller loan amounts and involves easy documentation. Long-term loans may take more time to be allotted as banks may thoroughly compute a borrower’s repayment capability & credibility.

Which loan to borrow?

Which loan to borrow? Whenever it is a need of selecting a business loan between a short- or long-term loan, there is no exact proper answer. The choice of selecting a perfect loan depends between the two depends on one’s need and capability to repay. If a borrower wants repayment without any kind of burden, then it is best to way to go with the long-term loan option. On the opposite of this, Those required individuals who want to have a speedy loan allotment and are ready to take a high-interest rate burden can go with short-term loans.

Frequently asked questions

Yes. Banks would require auxiliaries from the borrower for long-term loans to fulfill the risk appetite as the loan amount is high along with extended repayment duration.

The maximum repayment duration is up to 5 years which can be extended based on business requirements.

There is a nominal interest rate offered for long-term business loans by financial institutions.

Yes. Short-term loans are a better option when it comes to fulfilling temporary problems but however, but there are many risks too with short-term business loans.

The difficulty level to avail of a loan depends on many factors such as cash flow, time in business, credit score, business plan, and desired loan amount.

Yes. There are many loan provider who offers personal loan within this period of time for short-term emergencies.

Krishna Gopal Varshney

Krishna Gopal Varshney co-founder & CEO of Myitronline is amongst the top emerging startups of Asia and authorized ERI by the Income Tax Department. A dedicated and tireless Expert Service Provider for the clients seeking tax filing assistance and all other essential requirements associated with Business/Professional establishment. Connect to us and let us give the Best Support to make you a Success. ”

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