June 29, 2022
Is a Long-Term Business Loan Right for Your Company?
This blog post will cover everything you should know about long-term financing. After reading this post, you can decide if this is the right business 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
- Cash flow
- Debt refinancing
- Expansion projects
- Marketing expenses
The Pros and Cons of a Long-Term Business Loan
A long-term business loan program can provide substantial 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)
- A lengthy approval process, especially if you are applying for a long-term bank loan.
- More documentation could be required to be approved for longer terms.
- You’ll likely need a high credit score 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.
Should You Apply for a Long-Term Business Loan?
The right business financing option 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 already established businesses generating substantial revenues for at least a few years. Often, these lenders have a time in business requirement that will disqualify any company 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
- Your current credit card debts
- Information on outstanding loans
- Other financial 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 of 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, suppose you are using the loan funds for a renovation or expansion project. In that case, you may be more likely to see a high return on your investment. Therefore, business lenders may be more confident that you’ll have the funds available to pay your loan balance. A business’s success depends on vision, planning, and market opportunities. Business 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 majorly impact 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 to spend elsewhere. A substantial portion of your revenues may be diverted to repaying the loan.
- Interest payments can add up quickly: Long-term loans often come with low-interest rates. However, even low-interest rates can add up to a large amount over a long period. Make sure you calculate the total cost of every loan you’re considering. Doing this can ensure you can repay your loan but still afford your other business expenses, such as payroll and marketing costs.
- 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 score needed to respond.