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Is a Long-Term Business Loan Right for Your Company?
May 18, 2021
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Is a Long-Term Business Loan Right for Your Company?

Long-term business loans are a popular business financing option that can provide the stability and working capital that your business needs to expand. However, it’s important to understand the benefits and drawbacks of a long-term business loan. It’s also vital to consider your business’s needs, current financial situation, and future.

In this blog post, we’ll cover everything you should know about long-term financing, so you can decide if this is the right option for your company. In some cases, your business may be better off pursuing short term financing or another type of loan.

What is a Long-Term Business Loan?

With a term loan, a lender offers a business owner a lump sum of cash. Typically, they can use this loan amount for whatever they want, including real estate, equipment, inventory, and other business expenses.

Then, the business owner will pay back the loan with fixed payments, which could include interest and other fees. A long-term business loan is paid back monthly over the course of several years.

The Pros and Cons of a Long-Term Business Loan

A long-term business loan can provide a substantial sum of cash, allowing you to buy expensive equipment, expand staff, and make other necessary investments.

Compared to short-term business loans and other types of financing (like lines of credit or Small Business Administration (SBA) loans), long-term loans provide many benefits:

  • Lower interest rates
  • Fixed payment terms
  • Monthly payments
  • Lower fees (compared to other financing options).

However, long-term small business loans also have drawbacks:

  • A long application process.
  • More documentation could be required.
  • You’ll likely need a high credit score in order to qualify for a long term business loan. If you have a bad credit history, you should focus on raising your business and personal credit scores instead.

Further, the large lump sum will eat into the total credit available to your business. As a result, less working capital may be available in the future.

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Should You Apply for a Long-Term Business Loan?

The business financing option that’s right for you will depend on your current situation and needs. Let’s consider whether a long-term business loan is right for you:

1. Long-Term Business Loan Lenders Prefer Established Businesses

Long-term business loans often involve large sums. As such, business lenders prefer to work with businesses that are already established and that have been generating substantial revenues for at least a few years. Often, they have a time in business requirement that will disqualify any business that hasn’t been operational for their specified length of time.

To qualify for a small business loan with a longer repayment term, you’ll likely need to submit annual revenues, profits, and other financial metrics over the course of several years. To that end, lenders may require financial documentation.

2. Lenders Will Need to be Confident in Their Investment

Usually, long-term business loan lenders prefer businesses with high credit scores. Your credit score indicates how likely you are to repay the loan. Given the risks that come with extending financing, lenders will pay close attention to your credit score and business history.

Lenders may also request detailed plans regarding how you’ll invest the money into your business. A business’s success often comes down to vision, planning, and market opportunities. Lenders may want to see all the above, and could request documents such as:

  • Your business plans
  • Cash flow projections
  • Bank statements
  • Tax returns

3. Long-Term Business Loans are a Major Commitment for Businesses

When you take out a long-term business loan, you’re signing a long-term contract that will have a major impact on your company’s finances. Here are a few ways that this financial commitment can affect your business:

  • You’ll need to be able to afford monthly payments: As you make payments on your loan, you’ll have less money available for spending elsewhere. A substantial portion of your revenues may be diverted to repaying the loan.
  • Interest payments can add up quickly: In addition, long-term loans often feature low interest rates. However, even low interest rates can add up to a large amount over a long enough period. Make sure you calculate the full cost of every loan you’re considering, so that you can ensure that you can repay your loan while also affording your other business expenses.
  • You may not be able to qualify for financing later on: If you receive a business loan now, you may have less credit available in the future. Lenders are less likely to lend to businesses that already have outstanding debt. Should you be faced with an emergency or opportunity in the future, you might lack the necessary credit needed to respond.

Also, it’s important to remember that debt is a liability. Long-term debt will be on your books for a considerable length of time, potentially increasing risks.

Should a recession strike or market conditions change, you could find yourself in a tight spot, forced to make inflexible loan payments. This happened to many business owners during the COVID-19 pandemic, so this is something you should examine prior to taking out a long-term loan.

Conclusion: Consider Your Business’s Financial Situation Prior to Applying

Before taking out any business loan, it’s important to look at your business’s financial situation objectively.

Business loans can provide the funds needed to take advantage of market opportunities and to grow your business. At the same time, business loans come with their own drawbacks and can create risks. Make sure you consider these factors before submitting your application, so that you make the right decision for your small business!

Do you want to find out if your business can qualify for additional financing? If so, click the link below to get your free business financing quote from Fora Financial:

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Editor’s Note: This post was updated for accuracy and comprehensiveness in May 2021.

Fora Financial

Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.

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Fora Financial is a working capital provider to small business owners nationwide. In addition, the Fora Financial team provides educational information to the small business community through their blog, which covers topics such as business financing, marketing, technology, and much more. If you’d like to see a topic covered on the Fora Financial blog, or want to submit a guest post, please email us at [email protected].