Is a Long-Term Business Loan Right for Your Company?
In this blog post, we’ll cover long-term business loans, so you can decide if this is the right option for your company.
What is a Long-Term Business Loan?
With a term loan, a business owner will be provided with 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 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 major necessary investments.
Compared to short-term business loans and other types of financing (like lines of credit or 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. If you have bad credit, you probably won’t qualify.
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.
Should You Apply for a Long-Term Business Loan?
The business financing 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, lenders prefer to work with businesses that are already established and that have been generating substantial revenues for at least a few years.
To qualify for a 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 business plans, cash flow projections, and other documentation.
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. 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.
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.
Further, 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.
Conclusion: Consider Your Business’s Situation
Before taking out any loan, it’s important to look at your situation objectively. Business loans can provide the funds needed to take advantage of market opportunities and to grow your business. At the same time, loans come with their own drawbacks and create risks. Make sure you consider these factors, so that you make the right decision for your small business!
Editor’s Note: This post was updated for accuracy and comprehensiveness in May 2019.
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.