A Small Business Owner’s Quick Guide to Long Term Loans
Key Takeaways
- Long-term loans are best used to fund long-term business expenses, like expansion, equipment purchases, and more.
- The repayment period for long-term business loans can range from three to 25 years, depending on your business’s overall financial health.
- The repayment period for long-term business loans can range from three to 25 years, depending on your business’s overall financial health.
Ready to apply for a Long Term Loan?
If you’re a business owner, chances are, at some point you will find yourself in need of additional working capital to help fund certain business initiatives. One of the most popular financing programs to address such needs are long-term loans. This small business loan option allows businesses to borrow large sums and repay those sums in regular increments over a long period of time.
In this article, we’ll do a deep dive into long-term loans, touching on the different types, how you can apply for them and the pros and cons to utilizing them.
What are Long-Term Loans?
Long-term loans are a straightforward business financing option wherein the business receives a lump sum of money upfront. The company then pays the loaned amount of money back in fixed, regular (usually monthly) installments, plus interest.
The repayment period for business term loans can range from three to 25 years, depending on the business’ performance (cash flow, revenue, credit standing, etc.), loan amount, and purpose. In most cases, the lenders may require the borrowing business to pledge assets to act as collateral or security for the loan. In these instances, collateral can be anything from real estate property and equipment to invoices and inventory.
Once approved, the borrowing party can take advantage of loan amounts ranging from $500,000 to $5 million (for SBA loans) to be put towards initiatives like:
- Working capital
- Business expansion
- Inventory and supplies
- Payroll
- Hiring new employees
- Improvement or renovation of existing facilities
- Business acquisition
- Equipment purchases
- Refinancing existing debts
Since long-term loans have extended repayment periods, lenders are able to offer competitive interest rates. High-value collateral may even afford business owners notably lower interest rates because of the additional security.
Short-Term Vs. Long-Term Business Loans
The difference between the two term loan options lies in the loan amount, purpose, and length of the repayment period.
Short-term and long-term loans are both viable financing options for businesses looking to fund growth. The fundamentals of both loans are more or less the same. Lenders provide a lump sum that the borrowers pay back in regular installments within a fixed period or term.
Short-term loans, as the name implies, have a shorter maturity period. Loan amounts typically range from $2,500 to $50,000, and the repayment period can be anywhere from three months to one year. The primary use for short-term loans is to address short-term business needs like payroll, seasonal cash flow gaps, buying supplies, and emergency expenses.
Long-term loans tend to have more extended repayment periods and higher loan amounts. As such, they are a more suitable financing solution for long-term business needs such as expansion, buying equipment, and more.
Long-term loans typically require monthly repayments, while lenders may ask that short-term repayments be made weekly, even daily. Therefore, interest rates will be higher with short-term loans since the repayment period is much shorter.
Long-term loans offer the most favorable terms for small business owners but aren’t always the easiest to qualify for, particularly if you have a poor credit score. Lenders offering short-term loans are more likely to work with borrowers who have less than stellar scores.
What are the Pros and Cons of Long-Term Loans?
A long-term business loan can be a valuable financial resource that will allow you to embrace long-term growth opportunities. Some advantages (as compared to short-term loans) include:
| Pros | |||
|---|---|---|---|
| Lower monthly payments | Higher funding amount | Rates are highly competitive | Tax benefits |
| Cons | |||
|---|---|---|---|
| Long and tedious application | Lenders usually accept creditworthy borrowers | Collateral may be required |
Pros
Lower monthly payments. The longer repayment period of long-term loans also translates to more affordable monthly payments since payments are spread out over a long time. Business owners won’t have to worry about straining their monthly cash flow at the end of each month when they’re paying back the debt.
Higher funding amount. Long-term loans come with higher loan amounts – usually up to $5 million. If the bank grants you the financing, you can put the funds towards large investments like expanding your business to another location, adding more staff, product expansions, or buying new equipment.
Rates are highly competitive. Banks usually offer the best rates when it comes to long-term loans. However, they are notorious for being strict when it comes to small business loan applications. Nevertheless, you can still get a better rate for long-term loans than other types of financing when you apply for a long-term loan from alternative lenders.
Tax benefits. The interest rate you pay on your loan is tax-deductible, given that you meet the eligibility criteria for the tax break. For one, you and the lender should have a true lender-debtor relationship, meaning your lender should not be a member of your family or one of your friends; And two, you have to actually spend the loan’s proceeds.
Cons
As attractive as long-term business financing may seem to those looking for an affordable source of funding, it’s worth noting that it also comes with its set of downsides. Here are the cons of long-term business loans:
The application can be long and tedious. If you do decide to pursue long-term loans, you’ll have to be prepared to go through a good amount of red tape, paper work, and multiple assessments (especially if you’re applying for an SBA loan). The higher the loan amount is that you’re applying for, the more rigorous the approval process will be. So if you’re looking for quick access to cash to address a time-sensitive investment, this might not be the best financing option for you.
Lenders might require borrowers to be established and creditworthy Remember, long-term loans involve large sums. That said, lenders will want to work with established borrowers who are a couple of years old and have generated substantial revenues in the past few years. The business must also have a good credit score (650 or higher) and have no history of loan defaults to improve their odds of qualifying.
You’ll have to pledge collateral. Whether it’s a car, your home, expensive business equipment, or inventory, the bank will require you to present some sort of collateral for the loan. This provides security to the lenders and incentivizes them to offer better loan terms. If you default, you could risk losing a valuable item.
Ready to apply for a Long Term Loan?
Where and How to Apply for a Long-Term Loan?
One thing you should know about long-term loan applications is that the application process will vary from one lender to the next. Each will have a varying set of eligibility criteria and steps to take.
When it comes down to it, banks usually offer the best terms. However, their processes are also the slowest and most manual. Sometimes the entire loan application process can take 30 to 90 days. While there are banks that offer online applications, most of the time you’ll need physically visit the bank to submit the requirements and meet for your interview, among other assessments.
Online lenders and other Fintech companies have a more expedited application process. They don’t require as much documentation as banks do, and they allow borrowers to complete their entire application online, submitting only electronic copies of their financial documents and other paperwork. That said, the expedited process typically comes with higher interest rates.
Requirements for a Long-Term Loan Application:
Regardless of the lender you choose to work with, being prepared always expedites the process. In general, banks and other lenders will ask you to submit the following requirements:
- Government-issued valid IDs
- Business licenses and permits
- Balance sheets
- At least two years’ worth of personal and business financial statements
- At least two years’ worth of personal and business tax returns
- Business plan
- Collateral documentations
- Debt schedule
- Use of proceeds statement
Always be truthful and honest on your paperwork and documentation. If the bank or lender sees inconsistencies, it will only drag the application process out further and may even lead to a loan rejection. Sometimes the lenders will ask for additional documents to further verify your eligibility. This can include business lease documents, articles of incorporation, manager resumés, and others. Coordinate with your chosen lender’s loan manager to discuss what additional documents they might require so you can prepare them beforehand.
Ready to apply for a Long Term Loan?
Wrapping Up
While business financing can aid a lot of opportunities for growth, it does comes with risks and drawbacks that may compromise your company’s financial stability. Be sure to do your research and consider these before applying for long-term loans, or any business loans for that matter.
At the end of the day, if you’re looking for a financing option to help you address a large investment – i.e. renovations, building construction, product expansion, or equipment purchases – long-term loans can be a viable financing solution. You can apply for one from banks or alternative lenders. Banks tend to offer the best terms, but alternative lenders will be less strict and more flexible regarding the qualifications.
Ready to apply for a Long Term Loan?