A Long-Term Small Business Loan Could Benefit Your Small Business
A long term small business loan could be right for your business. The advantage is that they normally cover a repayment period of 3 to 10 years.
In some ways, spreading out payments over longer periods of time gives you more flexibility. They also offer more manageable payments. However, there are downsides to a long-term business loan as well.
Regardless of your financing needs, it’s important to understand the differences and the numerous options available. This can help you make the wisest financial decisions for small business financing.
What Is Long Term Small Business Loan?
Long-term business loans usually cover 3 to 10 years. However, they can be extend as long as 25 years. In contrast, short-term business loans typically have terms that are less than three years. Repayment terms vary depending on the product. However, typically payments are made more frequently than with a long-term small business loan. Keep in mind, they also carry very high interest rates.
How Does A Long Term Small Business Loan Work?
Among the various types of business loans, these types of loans have terms that may vary slightly depending on the lender’s eligibility requirements and the borrower’s needs.
Some lenders may offer equipment loans or other specialty financing that have terms specific to the loan’s use. Other long-term loans may have terms dependent on the borrower’s qualifications and loan amount.
The money you borrow from the lender including interest is to be paid back in-full by the end of the specified term. This is usually paid in monthly installments.
The following are a few common characteristics of long-term business loans:
- Higher loan amounts than short-term business loans
- Lower interest rates compared to short-term financing
- Collateral is often needed
- Qualifications will vary by lender but generally include an established business history, a strong credit history, and proof of financials
Long-Term Business Loans Uses
Small businesses typically choose long-term financing to cover larger investments that support the growth of the business. Since long-term business loans have longer repayment terms, they aren’t typically used for emergency expenses or cash flow issues.
Long-term small business loans may be useful for the following purposes:
- Real estate purchases
- Building renovations
- Equipment financing
- Debt refinancing
- Purchasing another business
Who Is Eligible for a Long-Term Business Loan?
The biggest differences between short-term and long-term business loans are the eligibility requirements. Long-term loans may be for larger sums of money and require payments over a longer period of time. Thus, they equate to more risk for lenders.
Because they present more risk, these types of loans may be more difficult to qualify for. Generally, lenders want to see proof that your business is capable of taking on long-term payments. That means that you may need to provide more documentation that shows your business’s credibility as a borrower than you would for a shorter-term loan.
Eligibility requirements for these types of loans vary from lender to lender. Businesses that meet the following criteria have the best shot at long-term business loans:
- Established for more than two years
- Strong business and personal credit
- Proven track record of generating revenue
- Collateral to offer
- Borrowers who own a large percentage of their business
Lenders will also assess your debt-to-income (DTI) ratio to evaluate how much debt you are carrying in proportion to your annual revenue. Therefore, carrying a large sum of debt may affect your ability to qualify for a long-term small business loan.
Typical Rates and Fees for Long-Term Small Business Loans
Rates and fees vary depending on the type of loan you choose. Typically, the annual percentage rate (APR) is lower for long-term loans vs. short-term loans.
Banks are known for having lower rates, as are SBA loans, for well-qualified borrowers. Some online lenders typically have higher interest rates in comparison.
In addition to the interest rate, there may be fees associated with your long-term business loan:
- Application or origination fees: Charge for processing your application and setting up the account.
- Underwriting fees: Help cover costs of verifying documents and credit reports.
- Prepayment penalties: Some lenders may charge fees if you pay back the loan early.
- Service fees: Cover ongoing costs related to your account.
Who Offers These Types Of Loans?
You may associate long-term business loans with traditional banks or credit unions. However, there are a growing number of alternative lenders who offer online business loans. Banks and credit unions may be able to offer better rates and terms to well-qualified borrowers. Yet, they usually have more stringent loan qualifications than online lenders.
Common Loan Terms
Business loan terms vary depending on the type of lender, loan amount, what the funds are being used for, and borrower qualifications. Generally, loans like these range from 3 to 25 years, though some terms may be shorter or longer. Loans through the SBA often have the longest terms, while alternative lenders typically have terms of less than five years.
