Financial hurdles are unavoidable in running a business. It may be an unexpected setback like the breakdown of equipment or an emergency situation. It could also be a precursor of growth in such instances as improvement of facilities or expansions. Sometimes though, these financial hurdles can come in the form of a big expense that is more than you can afford at the moment. In these instances, most business owners turn to one solution: long-term business loans.
By providing you the stability and capital you need and allowing you to pay the costs of such a large expense in intervals over a longer period of time, long-term business loans are ideal solutions to any financial hurdle. Before you start filling up applications though, it’s important you understand the benefits and drawbacks of this loan. It’s vital you understand why you need it, what your business needs, and your current financial situation. Here’s a simple guide with everything you need to know about long-term business loans.
How Do Long-Term Business Loans Work?
This loan prevents you from making too huge a damage to your finances by paying a lump sum out of pocket. Instead, a lender provides you the needed cash which you then pay back. What makes this such an enticing choice for business owners is the fact that you can pay back your loan over several years inclusive of interest and fees. With this setup, the payback isn’t as heavy on your cash reserves.
When To Use A Long-Term Loan:
Aside from the long payback period, business owners love long-term loans because it allows them to use it in pretty much anything to advance their business. Just about any large business expense can be covered by this loan. Some instances they come in handy are:
Refinancing existing debt
Inventory or supply purchase
Commercial real estate purchase
Improvement of facilities
Hiring new employees
Interest Rates to Expect
Much like other loans, interest rates for long-term loans can vary depending on several factors. These include the amount of the loan, the interest rates of the lender, and the creditworthiness of the borrower. New businesses or businesses with a poor credit history will receive higher interest rates going as high as 30% or more. Businesses with the best credit histories can receive the lowest interest rates at 5% or lower.
Term Lengths to Expect
Like the interest rates, term lengths also vary. Some factors lenders take into consideration are their policies, the amount of the loan, and how it will be used. Commonly, most long-term loan term lengths last from three to 10 years. Certain loans like those used for the purchase of commercial real estate can extend up to 20 years.
Who Qualifies For Long-Term Business Loans?
Different lenders have different requirements for you to qualify for a long-term loan. Their common grounds though include the following:
You must own at least 20% of the company
You must have a legitimate business reason for the loan
You should have a high credit score. Most lenders require a minimum credit score of 600 but the higher it is, the better are your chances for better interest rates and terms
You should have been in operations for more than two years
Collateral is required for larger loans or those typically exceeding $100 000
Since most lenders require a minimum of two years of operations, it can be quite difficult for startups and new businesses to get long-term funding, especially with traditional banks. But there are other options including alternative lenders and Small Business Administration programs. To prove that you’ll be able to pay back the loan, most lenders will require future projections and business plans in addition to the traditional documentation.
Borrowers with bad credit history, on the other hand, have the option to go with alternative lenders. You can get approved even with a credit score as low as 600. But keep in mind that interest rates will often be much higher. Keep working to boost your scores to apply for better long-term loans in the future. Also, remember that most lenders will also take your credit history into account. Foreclosures, defaults, or bankruptcies can all disqualify you from getting approved for long-term loans.
Benefits and Drawbacks of Long-Term Business Loans
Before starting to scout for lenders, think long and hard about the benefits and drawbacks of this loan. Look at each pro and con and decide if the benefits outweigh the cons in the long run.
Lower Payments: Long-term loans reduce the strain on the company’s cash flow by allowing large expenses to be broken down into small monthly payments.
Low Interest Rates: Lower payments and low interest rates go hand in hand with this loan. The higher your credit score, the lower the interest rates you can avail from 5% and below.
Fixed Payment Terms: In this way, this loan provides more stability in your finances.
Long Application Process: Long-term loans aren’t suited for those who need cash immediately since the application process may take months.
More Documentation Requirements: Since this loan covers large amounts of money, lenders would often require more documentation requirements than your average loan. The risk is high for them so they’d want to make sure you can pay back the loan. Do your research beforehand and come prepared with everything they need.
Collateral Requirements: Big long-term loans often require collateral. Sometimes, it will be the items purchased with the loan or it can be personal assets and business assets. Other times, lenders would ask you to agree to a blanket lien or sign a personal guarantee before you receive the loan.
High Credit Score Requirement: To get the best terms and rates, a great credit score is required. The higher, the better. Those with lower credit scores or even bad credit would often receive higher rates and terms.
Overall Costs: Although the cost of the loan is spread out over a long period of time, the overall cost at the end of it with the fees and interest can still be quite expensive. Some long-term loans also have variable rates. When market rates fall, these can be beneficial for you but on the downside, if the rates increase, your loan could become more expensive.
Where to Apply for Long-Term Business Loans
After weighing the pros and cons and you still decide to go through with getting a long-term loan, it’s time to consider which lender you’re going with. With this kind of loan, there are three main sources for business owners: banks and credit unions, the Small Business Administration, and alternative lenders.
Banks and Credit Unions
Banks are the first thing to come to mind for loans but they’re notoriously hard to qualify for with this loan. They have strict requirements when it comes to credit scores, annual revenues, and time in business. The application process can also take so long. But if you do qualify and you’re willing to go through the lengthy process, you’ll be rewarded with one of the most affordable loans out there. Credit unions, on the other hand, have more flexibility with their requirements. But like banks, they’d also be more interested in borrowers with high credit scores and stable business history.
Small Business Administration Programs
The SBA has plenty of various lending programs suited for different kinds of businesses and their needs. What makes them so popular with both borrowers and lenders is that the SBA sets guidelines that keep interests low and guarantees high. With this guarantee, it’s easier for small businesses to get approved for loans.
There are programs like the 7(a) program that allows you to borrow up to $5 million and repay it over the course of 10 years. There are also microloan programs that provide smaller loans up to $50 000 which you can repay over the course of six years.
The leverage alternative lenders hold over other lending options include lower credit score requirements and a faster approval. However, this comes with a couple of drawbacks as well. One of the biggest is the higher interest rates which can be 30% and over. Alternative lenders also have lower maximum amount loans and they often set their repayment terms at five years. However, if the investment is enough to tide you over or move forward, it might be a suitable loan. If you don’t meet the qualifications of other lenders, this one might work for you.
A long-term business loan can be an ideal solution to your large expense needs. But it’s important to consider your situation objectively. Understand why you need, consider the pros and cons, and do your research. Make sure you’ve considered all factors then look for a lender that offers exactly what you need.