by Karen Murphy, MostChoice.com

When it comes to debt financing, your choice of a long-term or short-term loan might not be yours to make. Are you a startup company or a new business? The options available to you could be limited. But, take heart -- limited options are better than no options at all. And your chances of securing certain types of loans could be quite good.

A General Description

Business debt generally falls into two categories: short-term and long-term commercial loans.

A third kind of business debt -- equity capital -- falls outside the category of a loan in that it is not something you have to repay, but money you get by selling a part interest in your business. In contrast, commercial loans are usually taken out for a specific expenditure. This fixed amount of money is borrowed for a set time with interest paid on the lump sum.

Long- and short-term loans are distinguished from one another by two factors: the source of repayment; and the time you have to repay the loan.

Short-term loans are generally less than a year and are repaid from the liquidation of the current assets they originally financed. Long-term loans are generally more than a year and are usually repaid from earnings.

Short-term Loans

Do you need financing for accounts receivable, or for building inventory? These short-term financial needs are the kinds typically covered by short-term loans. While these loans can have terms as brief as 90-120 days, they may extend one to three years for certain purposes.

Lenders of short-term loans usually expect to be repaid soon after the purpose of the loan has been served. In the case of an accounts receivable loan, you would be expected to repay your loan when your customers pay their outstanding accounts. You would repay an inventory loan when your inventory is converted to salable merchandise.

Because they represent a greater risk, bank loans to startups and new small businesses are generally short-term loans.

Lenders will review a company's cash flow and regular history before granting a secured or unsecured loan.

The most common of the two is the unsecured loan, which relies on your credit reputation and does not require that you put up collateral against it. A secured loan will require a pledge of some or all of your assets, which could include inventories or accounts receivables, as protection for its depositors against the risks that are involved.

The short life of this loan proves beneficial in relation to interest. Short-term loans usually have fixed interest rates, limiting your risk of paying rising rates.

Long-term Loans

Long-term loans are used for a variety of purposes from major equipment purchases to acquisitions to business expansion, but they all have one thing in common: they provide money that you plan to pay back over a fairly long time -- usually in periodic installments from earnings.

Most often, the loans are secured by the asset being acquired; however, banks may require additional security of other physical assets, additional funds from shareholders, or personal guarantees from the principals.

Smaller businesses might have a difficult time securing a long-term loan. In fact, it is rare for a bank to extend a commercial loan to such a company for more than a one-to five-year maturity. A lender must feel confident that the business will remain solvent for the full term of the loan. Otherwise, they may require additional collateral and may limit the length of the loan.

Lenders make loans to businesses that exhibit strong management ability and steady growth potential. You must have a written business plan, including a cash flow analysis that demonstrates the ability of the business to repay the loan principal and interest over the term of the repayment schedule. In addition, lenders will require appropriate insurance to protect the assets.