You are a business owner, and you have encountered a financial constraint in the form of a large business expense. This expense can be completely unexpected, like a breakdown of equipment, or it can be planned, such as the purchase of commercial real estate or business expansion through facilities’ improvement. Regardless of what it is, a significant expense can be challenging to pay upfront. When it is an emergency expense or unexpected, the situation can be even worse. Nonetheless, most smart business owners have found a solution for significant expenses: long-term business loans.
If spreading out the cost of a huge expense over a longer period sounds appealing to you, this funding option might be the right choice for your company. Nonetheless, you do not want to rush to fill out a loan application with a lender just yet. Instead, carry out some research and boost your knowledge. Keep reading to learn more about terms, rates, drawbacks, and benefits of long-term business loans.
What is a long-term business loan, and does it work?
A long-term business loan is a kind of loan that is paid back over a longer period of time. The creditor loans the borrower a set amount of money for the business expenses, like purchasing a commercial vehicle, hiring new employees, buying equipment, and real estate.
With the aid of a long-term loan, you do not have to pay a large sum out-of-pocket. Instead, the lending institution will provide the required funding, which the business will pay back over several years in fixed amounts, together with fees and interest.
Long-term business loan terms
The term lengths of a long-term business loan vary depending on various factors, the inclusion of the amounts of the loan, how the funds will be used, and the policies of the lender. Typically, most long-term business loans have terms between three and ten years. Nonetheless, some long-term loans, like those used to buy commercial real estate, may have repayment terms of twenty years or more.
Long-term business loan interest rates
Like other types of business loans, long-term loans do not come with set interest rates. The interest varies from one lender to another, the amount of the loan, and the borrower’s creditworthiness. The most qualified loanees with the best credit histories can often get interest rates below 5-percent from a conventional lender such a bank. Businesses with a poor credit history and small businesses might receive interest rates of 30-percent or more from alternative lenders.
Do I qualify for a long-term business loan?
Qualifications for long-term business loans vary from one lender to another. Nonetheless, there are a few general requirements set by most lending institutions. Provided you are applying for a long-term business loan; you must have a legitimate business expense that will be paid off utilizing the loan proceeds. You must also own at least 20-percent of the business. All the borrowers must have a minimum credit score of 600, even though higher scores are needed to get the best terms and interest rates. The majority of conventional lenders also need a business to be in operations for at least two years. Note there are also annual revenue qualifications that must be met. For most larger business loans exceeding $100,000, collateral is required. Even when particular collateral is not needed, a blanket lien or a personal guarantee will often be part of the loan contract.
Can you get a long-term business loan with bad credit?
Banks, credit unions, and other conventional lenders often have higher credit score requirements. Typically, they lend to borrowers with scores in high 600s or above. Most lenders will also look at credit history and not just credit scores. Foreclosures, bankruptcies, or defaults in your history on past loans can make you disqualified from acquiring the long-term business loan.
For borrowers with poor credit, alternative lenders might be an option. These lending institutions will approve borrowers with credit scores as low as 600. Nonetheless, interest rates will frequently be much higher for these borrowers. If you are a borrower with scores below 600, or you want to lock the best interest rates and terms, you can get your credit score report and work to pay off current debts. You can also make additional steps to boost your scores before you apply for a long-term business loan.
Do startups qualify for a long-term business loan?
Most conventional lenders want to lend businesses that have been in operation for at least two years. When it comes to new and startups businesses, getting long-term financing can be challenging, but it is not impossible. Whereas new businesses might not qualify for traditional bank loans, there are other options for business loans. For example, Small Business Administration programs offer funding opportunities for new businesses. Alternative lenders are also less strict with their time in business loan requirements. Loan applicants should be prepared to show that the business has the capability to pay the loan. Instead of offering traditional documents (such as income tax returns), future projections and business plans might be required by the lending institution during the application process.
When does a long-term business loan make sense?
There are many situations where a business might require a long-term loan. Typically, just about any large business expenses can be funded through a long-term business loan, including:
- Purchase of expensive equipment
- Purchase of commercial vehicles or vehicle
- Business acquisition
- Purchase of commercial real estate
- Remodel or improvement of existing facilities
- ‘Business expansion
- Refinance an existing debt
- Hire new staff
- Purchase of supplies or inventory
The essential vital thing to remember here is that long-term business loans can be used for just about any business need. Nonetheless, the loan’s overall cost (including interest and fees) should always be taken into consideration. The profit on investment should always outweigh the business loan’s cost, and a long-term loan should only be accepted if the additional funding will make the business grow and become successful.
Benefits and Drawbacks of long-term business loans
When there is a need for a business loan, it is simple to get blinded by the prospect of funds without really thinking about the advantages and disadvantages of borrowing. Smart borrowers look at the long-term benefits and drawbacks of taking out the loan to evaluate if it will truly benefit their business.
Benefits of long-term business loans
- Low-interest rates: Borrowers with good credit scores can make excessive use of interest rates of less than 5-percent, making this one of the most affordable business loan options.
- Small monthly payments: Typically, large expenses can be broken down into inexpensive monthly payments by taking out a long-term business loan.
- Debt consolidation: Typically, borrowers that use long-term loans to consolidate or clear high-interest debt can save a lot of money over the loan course.
Drawbacks of long-term business loans
- Variable interest rates: Some of the long-term loans have variable interest rates, so you should be cautious. Whereas a variable rate might help you save money when market rates fall, there is always a chance that rates can increase, resulting in a more expensive loan.
- Collateral requirements: Most of the long-term loans require collateral. In some situations, the collateral will be the thing being purchased with the loan proceeds, like real estate, vehicle, or equipment. In other cases, borrowers will have to put up personal assets, business assets, agree to a blanket lien or sign a personal guarantee before the loan can be disbursed.
- Overall costs: The overall cost of a business loan over its lifetime can be quite costly, mainly for any borrower without a stellar credit rating. Even for most qualified borrowers, interest rates and fees can really take on extra money to the loan, so it is essential to fully understand the total cost of the loan before signing the contract.
- High credit score and credit history requirements: A long-term business loan can be one of the most challenging loans to obtain. A great credit score (with no negative entries on the credit history) is needed to get the most affordable financing. Whereas some lenders might work with borrowers with lower scores, the interest rates might too be too much, and the terms might be unfavorable.
- Long approval process: Based on the lending institution, getting approved for a long-term business loan can take months- so it is not ideal for a business that requires financing immediately.
- Documentation needed: Since long-term loans are frequently for very large amounts of funds, lenders want to make sure that all borrowers can pay back the loan. This indicates that there is a lot of paperwork engaged in the application process. Applicants must come prepared to take the time required to provide the lender with all documents to qualify for the long-term business loan.
How to choose the right long-term business loan?
The ideal long-term business loan for you is based on various factors, including how you intend to use the loan and want loans you qualify for. If you are a successful and well-established company, you might be able to qualify for competitive SBA loans. And if not, there are various options available, including loans for equipment funding, loans for small businesses, and others. To choose the right long-term business loan, follow the following steps:
- Research various lenders and loan options
- Check the loans you are eligible for based on ender requirements
- Compare and contrast interest rates to make sure you are getting the best deal possible
- Consider extra perks, such as same-day financing and early payoff discounts
- Secure all the essential personal and business documents, including tax info and annual income
- Apply for long-term business loans that best suit your needs
- Choose a loan that offers the best possible rates and benefits
Long-term business loans can be a great method to scale your business sustainably. Generally, long-term business loans have larger loan amounts, lower monthly payments, and longer-term lengths. In some situations, you should only pursue a long-term business loan if you have a substantial business expense that needs a large loan and may take years to pay for it.