We’re returning you to your hypothetical place as a small business owner in need of a business loan or lease. At some point in your career this is likely to happen, as we’ve noted in the past, so it’s not a bad idea to be able to put yourself in those shoes.
The next question for your business before you put your looping signature on the bottom line and enter into a contract that will get you your money and bind you to re-pay it is how long you’ll take to do so. This is an important and oft-overlooked factor.
If it’s an extremely short term, you can pay it down without interest rates creeping up on you or having to remember payments for two years. If it’s a longer term, you can spread out the impact. There are definitely upsides and downsides to both approaches, and it’s helpful to know what they are well before you obtain lending.
- The advantages of a short term loan is that you can pay everything back in short order. If you’re expecting quality cash flow or increased business due to the equipment your loan is getting you, it might be worth pulling the trigger on a shorter term. That means less interest over time and not having it hanging over your head for the long-term.
- On the other hand, a short term means bigger payments and less wiggle room. It’s not a good idea unless you’re certain you can pay off the loan balance quickly.
- A longer-term loan has the advantage of time. By paying off the loan over the long haul, you may pay more in interest, but you’ll pay less each month. This can be critically important for a business with cash flow challenges, or if you intend to hold on to the equipment for the long haul, as well.
- The disadvantages of longer terms mostly have to do with interest, as you might imagine. Even quality rates can seem oppressive over the course of many years.
Your best bet is to sit down with your team and your finance partner and hash out what term length makes the most sense for your particular business. There’s no one right answer, but there’s also no one wrong answer. Keep that in mind.
If you have questions we haven’t covered here, leave us a question in the comments or call and talk to one of our finance managers today.
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