A long-term business loan is a good fit for many small business financing needs. If you’re looking for capital to invest in a new building, a big ticket purchase such as a new lathe for a manufacturing plant, or anything else for business use that will likely be depreciated over several years of useful life, a long-term loan could be the appropriate way to finance those longer-term investments in business infrastructure and equipment. Many times those investments are needed to facilitate future business growth.

However, a long-term business loan may not always be the best, or even the only, choice for financing growth.

Growth can also be financed in other ways. While many growth initiatives can be described like the long-term investments mentioned above, many times fueling growth involves taking advantage of short-term opportunities—which might not be the best use for a long-term small business loan, unless you can confidently predict the repeated need for capital for such short-term opportunities.

Some of the growth opportunities that might be a good fit for a shorter-term solution include:

  1. Ramping up for a new contract. Sometimes new contracts or new customers require a short-term infusion of capital to get things up and running. It might require a business owner to prepare for new employees, update equipment to facilitate the new contract, purchase additional inventory, or bridge a potential cash flow gap created by a short lag between when you need to deliver on the contract and when you start getting paid. This might be a use case where short-term financing could make more sense than a long-term business loan.
  2. Purchasing quick-turnaround inventory at a discount. This could be another good fit for short-term financing. While it might make sense to finance equipment that will be depreciated over the course of several years with a longer-term loan, it might not make sense to make payments on inventory that will be sold over the course of a few months for several years into the future. Sometimes the accrued interest costs of a long-term loan can negatively impact that inventory’s ROI.
  3. Repairing or updating light business equipment or facilities. Depending upon the nature of your business, this could include updating an older machine with new technology to accommodate new quality control requirements or refreshing the décor or adding additional dining space in a restaurant to accommodate more customers. Many business owners turn to short-term financing to accommodate this type of growth.

The above examples of short-term growth initiatives are representative of some of the needs a business might face facilitating opportunities for growth. Fortunately, small business owners have more options than ever before to encourage growth—choosing the right financing simply requires matching the right loan terms to the loan purpose. In addition to traditional sources like banks, credit unions, or the SBA, depending upon the nature of the growth initiative there are other sources of capital, like online lenders, that could be a good fit.

Loan purpose should drive the decisions about loan term. Evaluating loan purpose before you start looking for a small business loan to finance growth will not only help determine the loan term—in addition to a thoughtful consideration of your current business and personal credit profile, it will help you identify the funding sources where you’ll most likely find success. It will also help you identify how much you should borrow and where you may need to improve your profile.

Accessing capital to fuel small business growth can be a big challenge for many businesses. What’s more, the world of small business lending today requires you to become savvier about your options so you can match your business needs with the right loan.

Once you’ve chosen the right loan for your business needs, it may be time to revisit your business structure and incorporate or form an LLC. Call us anytime at 888.449.2638 for a free business consultation!