Business Funding Options: Short-Term vs. Long-Term Financing

Searching for the best funding options for your business is a bit like shopping for a coat. One size most certainly does not fit all, and choosing the wrong style can be problematic depending on where and when you need it. But, while you can return the wrong coat and get something that suits you better quite easily, making the wrong choice with business funding can leave you in a bind for years, if not decades. On this page, we’ll explore short-term and long-term financing options, examples of each, and when they work best, so it’s easy to find the perfect fit for your needs.

Short-Term Funding: An Overview

Short-term funding solutions are ideal for immediate needs, like managing cash flow gaps, buying inventory, or handling emergencies. In situations where short-term financing is provided as a loan, the business usually has 12 months or less to pay back the balance. However, some lenders provide windows of up to three years, depending on the circumstances. That said, not all short-term funding options work like loans, meaning you may not have a mandatory repayment timeframe, or there may be no balance to pay back at all.

Examples of Short-Term Funding Solutions

Let’s take a look at how some common short-term funding solutions work in practice.

Business Credit Cards

A business credit card provides you with a set limit of funds you can spend. As you charge expenses, you can pay the balance back all at once or in monthly installments with interest.

Some credit card companies will focus solely on your business income and credit, while others will use a mix of business and personal creditworthiness to determine if you qualify and what your rates will be. Generally speaking, you’ll need a personal score of at least 650 to qualify, with better terms being offered to those with higher scores.

Limits will usually be somewhere between $2,000 and $50,000, depending on the strength of your application. If you carry a balance, expect to pay anywhere from 15 to 30 percent or more in interest. 

Merchant Cash Advances

With a merchant cash advance (MCA), you’ll get a lump sum upfront. Then, a portion of your credit card sales will be held back each time sales are processed until your balance is paid in full.

To qualify, you’ll need to demonstrate that your business has steady revenue from credit card transactions. Lenders also prefer to work with businesses that have been in operation for six months or more and will ensure you don’t have any major credit issues.

Depending on your revenue, you may be able to get anywhere from $5,000 to $250,000 through an MCA. However, it can be one of the pricier options, with APRs climbing to 300 percent, NerdWallet reports.

Invoice Factoring

With invoice factoring, you sell your unpaid invoices to an invoice factoring company like Viva Capital. The factoring company provides most of an invoice’s value up front and then collects the balance from the customer. When your client pays, you receive the remaining balance minus a small factoring fee.

Qualifying for factoring tends to be easier than the other methods because approval is based on the creditworthiness of the client paying the invoice. As long as you have strong B2B clients and follow standard billing procedures with terms that last no more than 30 to 90 days, you’ll likely qualify for factoring.

The amount available through factoring is primarily based on the size of the invoice, so limits can be modest or reach well over a million dollars. Although rates typically range from one to five percent of the invoice’s value, Viva’s start at just 0.25 percent.

When Short-Term Funding Works Best

Short-term funding is often thought of as a “financial bandage.” If you’re waiting for customer payments, need to address an emergency, or want to seize a business opportunity, it’s a solid choice. Some options, like factoring, also provide funding without putting the business in debt and don’t impact credit scores, so they can be useful in countless other scenarios, too.

Advantages of Short-Term Funding

Fast approval and access to funds are hallmarks of short-term funding. It also tends to be more flexible, with options tailored to your cash flow.

What to Be Aware of When Choosing Short-Term Funding

Because short-term funding options cut through red tape and don’t have as many qualifications, the overall cost can be a little higher. When repayment is required, the window for this is shorter, so it can feel higher, too. Always ensure your business can handle the accelerated pace before going with short-term financing options.

Long-Term Financing: An Overview

Long-term financing is more suited for larger investments, like purchasing equipment, expanding operations, or buying real estate. The loan is typically provided as a lump sum, and the balance is paid back over a period of years with interest. Depending on the nature of your loan, you might get anywhere from five to 30 years to pay the balance back.

Examples of Long-Term Financing Solutions

Now that we’ve covered the basics, let’s take a look at how some of the most common long-term financing solutions work.

Term Loans

A term loan is a traditional lump-sum loan that’s repaid over a set period, usually with fixed monthly payments. These are designed for significant investments that generate returns over time.

Qualifying for a term loan can be tricky. As a baseline, you’ll usually need to have been in business for at least two years and have proof of steady revenue and profitability. Lenders will likely look at your business and personal credit scores and typically do not provide loans to those with a personal score under 680.

Loan amounts can reach up to $500,000 or more. Well-qualified borrowers will typically have an interest rate in the neighborhood of six to 12 percent, though those with weaker credit will generally pay more. Depending on the loan, you may have anywhere from one to 30 years to pay off the balance.

SBA Loans

The United States Small Business Administration (SBA) backs loans that are provided through traditional lenders. The aim is to help ensure small businesses have access to funds. These government-backed loans often come with lower interest rates and extended payment terms and are typically used for expansion, acquisition, or working capital.

The process to qualify for an SBA loan is much like qualifying for a standard term loan. You’ll need a credit score of at least 680, plus a detailed business plan and projections. You may also be required to provide collateral on the loan.

SBA loan amounts can range from a few thousand to $5 million, depending on the program. Interest rates are typically between five and ten percent. Working capital loans typically have a ten-year term, while the term on a real estate loan can go up to 25 years.

Equipment Financing

You can only use equipment financing to purchase equipment. The loan or lease is secured by the equipment itself, making it less risky for lenders and more accessible to businesses.

To receive funding, you’ll usually just need to provide proof of revenue to cover payment and demonstrate you have no major credit issues. Most funding providers prefer to work with businesses that have been in operation for at least a year, though some will work with startups that have a solid plan.

You may be able to receive up to 100 percent of the equipment’s costs, depending on the type and value. Interest rates typically range from eight to 30 percent and are tied to the equipment’s depreciation. Loan terms often mirror the equipment’s useful life, which may range from three to seven years in a typical arrangement.

Invoice Factoring

Invoice factoring was covered earlier as a short-term solution, but it can also serve as a sustainable long-term funding strategy for businesses that consistently deal with delayed customer payments.

By factoring invoices regularly, businesses can stabilize cash flow over the long term, ensuring they always have the working capital to cover payroll, inventory, or other recurring expenses.

When Long-Term Financing Works Best

A long-term financing approach is better for big-picture goals. Think of it as a foundation for growth. For instance, if you’re expanding a manufacturing business and require new machines or upgrades to your facility, a term loan can provide the capital for it as well as time to pay the balance as your revenue grows from the investment.

Advantages of Long-Term Financing

Long-term financing options tend to come with lower costs, and the payments are often lower, as they’re spread out over a period of years. Because revenue usually grows as you’re making payments, and payments are typically fixed, it can provide stability for strategic financial planning as well.

What to Be Aware of When Choosing Long-Term Financing

Because you’re locked into a longer commitment, it’s crucial to predict your cash flow accurately. You’ll also need to plan ahead for seasonal lulls to ensure you have enough cash on hand to cover monthly payments.

Short-Term vs. Long-Term Financing: Selecting the Optimal Financial Choice for Your Needs

Knowing the advantages and disadvantages of financing options is a good start. However, choosing the right funding also depends on understanding your business’s current situation, future goals, and cash flow.

Step 1: Define Your Purpose

Do you need to manage seasonal gaps or cover operational expenses, like payroll or inventory? If so, a short-term funding option is usually best. Conversely, if you’re planning to grow your business, buy equipment, or expand facilities, a long-term financing option may be best.

Step 2: Evaluate Your Cash Flow

Do you have fluctuating or delayed cash flow? If so, opt for short-term solutions like factoring or lines of credit that align with your income. However, if you have strong, predictable cash flow, long-term financing with manageable monthly payments may be more ideal.

Step 3: Understand Costs

Calculate the total cost of financing, including interest and any fees. Short-term options can have higher APRs but are often cheaper overall because of shorter terms. Then, compare these costs to the expected return on investment (ROI) of your funding use.

Step 4: Assess Your Qualifications

Do you have strong credit? If so, term loans or SBA loans will likely be accessible and cost-effective. However, if you have limited credit or collateral, an option like factoring or MCA might be more accessible. Just be sure to keep the pros and cons of each in mind as you make a decision, as factoring is more ideal for those with B2B invoices and can be more cost-effective, while MCAs will be an option for those with credit card transactions, though can be more expensive.

Step 5: Keep Flexibility in Mind

If you’re uncertain about future needs, funding options like lines of credit or invoice factoring provide ongoing access to cash without committing to a large, fixed loan.

Get the Right Funding for Your Needs with Viva Capital

With business funding solutions ranging from invoice factoring to equipment financing, short-term financing, and asset-based lending, Viva Capital makes it easy to explore your financial options and find the right fit. To get started, request a free rate quote.