A Comprehensive Guide on Long-Term Business Loans
Long-term business loans have two big advantages. First, you can borrow more money to fund your growth. Second, because you’re spreading the cost over a much longer period, this makes monthly repayments more manageable.
However, long-term business loans are not right for every company. In this article, we explain what this type of financing is and:
The advantages and disadvantages of long-term business loans
Which companies are eligible for them
What long-term business loans are used for
How to prepare a loan application
How to navigate the application process
The Basics of Long-Term Business Loans
Let’s look at how long-term business loans work.
Like all loans, you borrow a certain amount of money (the “loan amount”), and you agree to pay it back over a set period of time (the “term length”).
Long-term loans have repayment periods of between three and 25 years.
Under the repayment terms of your loan, you'll know exactly how much money you'll owe each month until the balance is paid in full. You may even have the option of setting up auto-pay and having the amount debited straight from your bank account each month.
The interest rate on these loans is normally fixed, meaning it will remain the same over the life of the loan.
Long-term loans generally offer lower interest rates than short-term loans. Some borrowers may be charged higher interest rates if they have a poor credit record or they operate in riskier business sectors.
The Advantages and Disadvantages of Long-Term Business Loans
Long-term loans are a popular choice for many small business owners. Like all other financing options though, they have advantages and disadvantages.
Advantages of Long-Term Business Loans
Low interest rates: The interest rate on a longer-term loan is generally lower than on a short-term business loan or credit card, reducing your borrowing costs.
Lower monthly repayments: Less coming out of your bank account every month means it’s easier to manage cash flow.
Predictable repayments: Monthly repayments on a loan with a fixed interest rate stay the same, making budgeting and financial planning easier.
Higher loan amounts: You can often borrow much more money with a long-term loan compared to shorter-term funding options.
Disadvantages of Long-Term Business Loans
Potentially costly option: Despite their lower interest rates, a long-term loan may end up costing you more because of how much longer it takes you to pay back than a short-term loan with a higher interest rate.
Prepayment penalties: You might face early repayment fees if you pay off your loan early or make large lump-sum payments to reduce your outstanding balance.
Lengthy approval process: The application process is complex, and you may wait a long time for an answer and to receive your funding.
Deposit required: Some lenders want you to make an upfront deposit of 10% or more of the project or purchase you want to fund to reduce their risk.
Collateral: You may have to offer personal or business assets as security, which your lender can seize and then sell if you default on the loan.
Associated fees: There may be extra costs when you apply or accept the loan, like origination fees, which will increase the expense of the loan.
Where Can You Get a Long-Term Business Loan?
There are four main sources for longer-term business financing:
Traditional banks: Entrepreneurs and business owners often approach the institution they bank with because they already have a financial relationship with them.
Credit unions: Many credit unions offer long-term loans and may charge lower interest rates on them than the banks.
Alternative lenders: You can get a much faster decision from an alternative lender, but some may charge you a higher interest rate than a bank or credit union.
Small Business Administration (SBA) partners: The SBA loan program offers various types of long-term loan options for small businesses, like SBA 7(a) loans, SBA 504 loans, and microloans.
Who’s Eligible for a Long-Term Business Loan?
Eligibility requirements for this type of loan vary from lender to lender. But here are some of the criteria you can expect.
Time in Business
Many lenders will only consider applications from established businesses. Traditional banks, for example, will need to see two to five years of business operations before they consider your application.
The two reasons for that are:
More data about you: This makes it easier for them to see how profitable you currently are and how you manage cash flow.
More confidence in you: It shows banks you’re good at generating sales, managing expenses, and surviving revenue peaks and troughs.
If you’ve been in business for less than two years, you might have a better chance of getting a loan by approaching an alternative lender.
Strong Business Plan
Most lenders also want to see a business plan that includes:
Business overview: Explain what your business does and the customers you serve.
Market analysis: Detail who your competitors are, the size of the market you operate in, and what makes your products or services stand out.
Organization structure: Show how you and your key team members have the experience and knowledge to drive the business forward.
Product or service lines: Describe what you're selling and explain how it meets the needs of your target market.
Marketing and sales strategies: Outline how you attract customers and which channels you use to reach them.
Detailed financial projections: Provide revenue, expense, and profit estimates for the next three to five years.
In your plan, explain exactly how you intend to use the loan and show how your plans will generate the extra sales you need to stay profitable and cover the repayments.
Online lenders normally don’t require a business plan. They’re more likely to want to know about your past revenue and current business health instead. They may ask for permission to access your accounting software so they can have a closer look.
Creditworthiness
Lenders use business credit reports and credit scores to help them assess how likely it is that you’ll be able to meet each loan repayment in full and on time. They may even look at your personal credit score.
Additional Criteria a Lender May Require
Some lenders may also need you to satisfy the following qualifying criteria:
Down payment: Like when you put a deposit on a house, you may need to have a percentage of the project you want to fund in cash.
Collateral: Lenders often ask you to provide business or personal assets to secure the loan, which they can sell off to clear any outstanding balance if you can’t repay the loan.
Personal guarantee: If you still owe money even after your collateral has been sold, a personal guarantee allows a lender to pursue you personally for payment..
Which Businesses Take Out Long-Term Business Loans and Why?
Companies take out long-term loans for a wide variety of business needs.
Funding real estate projects is a popular use case. For example, a company can use a long-term commercial real estate loan to purchase a building and operate from those premises rather than renting.
Many manufacturers and healthcare providers rely on long-term equipment financing to have access to machinery, equipment, and vehicles.
Some companies also use long-term loans to refinance existing loans they have.
It could be that they have found a business lender offering a lower interest rate or they wish to extend the length of time it takes to pay back a loan to reduce their monthly payments.
Preparing to Apply for a Long-Term Business Loan
To give yourself the best chance of being approved, do the following before submitting your loan application:
Get your financial documents together: Bundle together your tax returns, profit and loss statements, and balance sheets so you can show lenders how healthy your business is.
Finalize your business plan: Pay particular attention to demonstrating where the money will come from to make your loan repayments.
Improve your credit: Check both your business and personal credit reports to amend any mistakes and work to improve your credit score.
Shortlist the best lenders: Research different lenders’ requirements, rates, and terms to find the one that matches your business needs.
Navigating the Application Process
Once you’ve chosen the lender you wish to approach, start filling out their application form. You can now do this online with many lenders.
You’ll need to fill in details like shareholder names, addresses, line of business, and more on the form. Your lender may also ask you to provide or upload your business plan and financial projections at this point.
Some lenders may want to meet you face to face. Expect them to ask you detailed questions about your business, your team, and how you plan to use the loan.
While all this is happening, your lender will also have applied for your credit report and/or credit scores, and they’ll factor that information into their decision.
After you’ve applied, you’ll wait for an answer.
Keep an eye on your email and phone during this period as your lender may want more information. Get back to them with what they need as fast as possible to minimize delays.
If your application is approved, you’ll be sent a letter showing you the repayment schedule and interest rate. If you’re happy with the offer, you’ll sign the loan documents and receive your money.
What if Long-Term Financing Isn’t the Right Option for Your Business?
A long-term loan might not be the right answer for your business. It can take weeks before you find out whether you’ve been approved or not. Creating a business plan and gathering together your financial documents takes a lot of time. Plus, you might just not want to commit to repaying a loan many years into the future.
Long-term loans aren’t your only option. With Backd, you could be funded within 24 hours. We streamline the entire process with quick turnaround times and minimal paperwork.
Apply for one of our two funding options:
A business line of credit offering up to $750,000
A working capital advance offering up to $2 million
Apply in just three minutes today to get the financing you need.
