Pros and Cons of Long-Term Business Loans
Lenders offer financing that can be useful for a number of small business investments including long-term business loans. However, there may be times when a short-term option may be preferable to a long-term business loan. Before making any final decisions, check out some pros and cons for long-term financing.
Pros of Long-Term Lending Options
Lower payments
Borrowers may consider a long-term business loan because they typically offer lower installment payments. Even if you borrow a significant amount of money, you may be able to negotiate the terms with the lender. Of course, longer terms mean paying more in interest over the life of the loan.
Lower Interest Rates
Choosing a long-term business loan doesn’t guarantee a lower interest rate. However, long-term business loans offer better rates than short-term loans for well-qualified borrowers. Interest rates may also be impacted by the borrower’s credit history and other factors. Securing favorable rates can help lower your monthly payments. It can also make the loan less expensive in the long-term.
Monthly Payments
Not every lender will have the same repayment schedule. However, long-term small business loans are typically paid in monthly installments. In contrast, short-term loans may have repayment terms that require borrowers to repay weekly or biweekly. It all depends on the loan product. Monthly installments can give borrowers more flexibility with cash flow since they don’t need to make payments as frequently.
Lower Fees
Long-term business loans may have fees. However, there are not as many as short-term financial products. Costs like factoring fees, bank wire fees, and invoice processing fees are more common with short-term funding options and can add to the cost of the loan significantly.
Cons of Long-Term Business Loans
Longer Approval Process
Since long-term loans are often for larger sums of money, the approval process can be more rigorous to ensure that borrowers are capable of paying back the loan on time. For example, you may be required to provide a form of collateral and prove a history of strong revenue performance to secure the loan. While this may be accessible for a well-established business, small business startups or those with limited credit history may struggle to qualify for long-term business loans.
Lenders may also take longer to review applications for long-term loans. If you need funding quickly, a long-term business loan may not be ideal since time to funding could be longer than your business can withstand.
Need Strong Credit
Long-term small business loan lenders typically require borrowers to have a strong credit history, generally a credit score of around 600 or higher is preferred. If you have less than stellar credit, it may be difficult to secure a long-term business loan, especially from a bank. Online lenders may offer more options for long-term business loans for bad credit, but interest rates are often higher than those available from traditional lenders.
More Documentation to Prove Creditworthiness
In addition to credit scores, lenders likely want to see more documentation that shows your business’s credibility. They may want to see profit and loss statements, bank statements, tax returns, and other proof of revenue and business history.
Total Cost Can Be High
It’s important to note that while interest rates may be relatively low on long-term small business loans, interest will accrue over the life of the loan, which can be expensive. Consider the total interest you will be charged over the life of the loan to evaluate.
