Long-term business loans are a valuable tool, offering comprehensive support for your company. They are instrumental if you wish to fund a large project (such as a growth strategy) through debt.
However, there are specific criteria associated with long-term loans. You must meet the requirements while approaching suitable sources that provide the necessary capital.
We have explored the purpose of a long-term business loan below and how to secure one for your company.
- What is a long-term business loan?
- Benefits of long-term loans
- What to contemplate before you apply
- Alternatives to long-term business loans
What is a long-term business loan?
A long-term business loan is a loan that is repaid over many years. Typically, a loan lasting between five and 30 years is classed as long-term.
They are commonly used to access higher finance amounts, which is why the repayment length is longer. However, this also poses more risk to the lender, so applicants must jump through more hoops to be approved.
Benefits of long-term loans
Raise more funds
Longer-term loans typically provide more considerable sums.
Due to the capital offered, the loans are instrumental in unlocking funding large-scale initiatives or goals.
For example, a long-term loan is ideal if you have an extended growth plan that requires new offices or factories. It might also be used to start a new venture, establish a project or invest in internal improvements.
Reduce the cost of monthly repayments
With longer terms loans, the terms can be quite extensive, which result in a lower capital repayment per month.
The amount you pay and how often will vary depending on the lender with some lenders prepared to look at loans that aren’t fully amortizing and incorporating bullet payments.
Reduce the risk
Long-term loans won’t be available from all lenders. It requires the provider to have access to the funds and be willing to lend them out, despite the risk associated.
Most loans will come from mainstream providers, such as high street banks or commercial lenders. These tend to be established in the market and heavily regulated.
There will be other alternative lenders also competing in this space.
Obtain competitive interest rates
Although the amount of funding raised is higher, long-term loans tend to have lower interest rates. This is due to the reduced cost of servicing the loan as well as to the increased conditions and any security needed to apply for the loan.
Accessing a competitive interest rate will reduce the amount you pay back in total while improving cost-efficiency.
What to contemplate before you apply
Alongside the benefits of long-term loans, there are factors to consider before you commit. We’ve listed five below.
The total cost will be greater
As a long-term loan lasts many years, you will be charged interest for longer, resulting in the total amount repaid increasing.
It’s crucial to check how interest is charged on the loan. If it is fixed for only a specific time or is variable, the amount you pay will likely fluctuate over the period.
Compare different providers to find one that offers the most competitive interest rate while addressing your needs.
It’s a long-term commitment
As the name would suggest, a long-term loan is a commitment. It needs to be built into your cash flows to determine that the returns that you expect exceed the cost of the loan.
You must be prepared for this commitment. In some cases, there may be an option for early exits if you clear the balance ahead of time, but most lenders will lay out any penalties for doing so.
You will need security
Due to the risk involved with a long-term loan, many lenders will seek additional security. The security allows them to recoup their costs if you default on payments, so they feel safer lending large sums of capital.
Examples of security include debentures and charges over the business, premises, high-value machinery or equipment. Lack of collateral will make it much harder to be accepted for funding.
You might be required to provide a personal guarantee as well – but this carries its own risk.
It’s a lengthy application process
Long-term loans tend to have stricter criteria to meet. Expect a lengthy application process to showcase your eligibility and answer the lender’s questions.
Lenders will examine your financial history and business strategy to determine your reliability and how you will use the funds. You will need a robust application, solid business plan, and forecasts to succeed.
The due diligence required will slow the application process.
Not everyone is eligible
As mentioned, long-term loans typically have a long and complex application process. There is also a limited number of lenders who will provide such support.
Due to this, it is harder to secure a long-term loan. You may have to spend time searching until you find a suitable solution, and even then, it’s not guaranteed you will be accepted.
If you fail to achieve funding, you’ll need to start the process again or consider alternative options.
Alternatives to long-term business loans
There are, fortunately, several alternatives if you struggle to find a long-term loan for your business or want to try another route. These include:
- Investment. This enables you to swap equity in your business for funding from shareholders. They will offer substantial funding to promising ventures, potentially providing further sums later if your company needs it.
- Invoice financing. Although typically used to boost cash flow rather than fund large projects, an invoice finance facility will offer funding against your unpaid invoices. It will free up capital to invest elsewhere in the company.
- Crowdfunding. Crowdfunding campaigns have proven successful in raising large sums of funding for businesses. However, you need a strong business case or vital cause that makes people want to part with their money and an engaging campaign.
- Short-term loans. Although short-term loans do not provide as much funding, they are often more accessible. They’re also compatible with other forms of finance, allowing you to increase your total amount.
There may be other options for you – it’s worth discussing your requirements with a commercial finance broker to determine the best route for your business.
Conclusion
Long-term business loans have a valuable purpose, allowing eligible companies to access increased funding levels to fuel growth and other objectives.
However, it is crucial to be aware of the stricter criteria associated with these loans, making it harder to succeed when applying for finance. You also need to be prepared for the commitment, including the repayment schedule.
Contact Pegasus if you seek a loan for your business’s funding needs. After looking at your needs and eligibility criteria, we will help you find a solution that meets your goals and increases your likelihood of succeeding.