Short-term and long-term debt are two options businesses have for borrowing money. The main difference between the two is the repayment period. When deciding which type of debt to use, companies should consider the repayment period and the interest rate but understand both options entirely.
Also called long-term liabilities, this is any financial responsibility that goes beyond 12 months. Long-term debt is often used to finance a major purchase or project because the repayment period is so long. Businesses will make monthly or quarterly payments to repay the debt. In the case of long-term debt, interest rates are often lower than short-term debt.
A significant drawback of long-term debt is that it restricts monthly cash flow. The higher your debt, the more you need to pay each month. This means you use more of your monthly earnings to pay down the debt when you could make new investments to grow your small business. It also takes away from a much-needed safety net that can cover unexpected costs.
Long-term debt is usually tied to collateral. For example, building loans are secured by your property as collateral. If you do not repay this debt, you will lose your property to the bank. This also can happen with company equipment and cars.
Both short and long-term debt poses a risk to your business. Finding the right balance is vital to any small business. By leveraging American Finasco, your debt can be managed, reduced, or consolidated while you stay focused on your business. Visit Contact Us and complete our Online Form for a free consultation or call (800) 299-2909. We look forward to speaking with you.
Watch for our next blog when we explain how Short-term debt is different than Long-term debt