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Is a Long-Term Business Loan Right for Your Company?
December 15, 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 before applying. It’s also vital to consider your business’s needs, current financial situation, and upcoming goals.

In this blog post, we’ll cover everything you should know about long-term financing, so you can decide if this is the right funding 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?

If you apply for a term loan, a business lender will provide you with a lump sum of cash. Typically, you can use this loan amount for any business need, including costs such as:

  • Real estate
  • Equipment
  • Inventory
  • Payroll
  • Debt refinancing
  • Marketing expenses

After receiving a business loan offering, you’ll pay back the loan with fixed payments, which could include paying interest and other fees. A long-term business loan is paid back monthly over the course of several years. However, the term will vary based on numerous factors determined by your lender.

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

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The Pros and Cons of a Long-Term Business Loan

A long-term business loan program 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 approval process, especially if you apply for a bank loan with long terms.
  • More documentation could be required to be approved for longer terms.
  • 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 to you 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 financial needs. In the section below, we’ll explain how you can determine if 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, alternative lenders prefer to work with businesses that are already established and that have been generating substantial revenues for at least a few years. Often, these lenders 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 the following:

  • Annual revenue
  • Monthly bank statements
  • Other financial metrics over the course of several years

To that end, lenders may require other financial documentation. In some cases, they’ll want to see your current credit card debts, information on outstanding loans, and other metrics that will help them determine your business’s financial health.

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 on-time and in full. Given the risks that come with extended financing terms, business lenders will pay close attention to your credit score and business history.

Alternative and online lenders may also request detailed plans regarding how you’ll invest the money into your business. For example, if you are using the funds for a renovation or expansion project, you may be more likely to see a high return on your investment. Therefore, lenders may be more confident that you’ll have the funds available to pay your loan balance.

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 come with 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 but still afford 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 taking on business 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.

If you aren’t sure that you can commit to a long-term loan, you may benefit from taking out a shorter-term loan first. If you can responsibly pay off your balance but need more funding, the lender may be willing to provide you with a larger loan amount with extended terms in the future.

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 come with some notable risks. Make sure you consider these factors before submitting your loan application so that you make the right decision for your small business!

Editor’s Note: This post was updated for accuracy and comprehensiveness in December 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].