What Are the Pros and Cons of a Long-Term Business Loan?

What Is a Long-Term Business Loan?

A popular business funding option, long-term business loans offer the stability and working capital that a small business requires to grow. That said, it is important that a business owner understand the advantages and disadvantages of long-term business loans prior to submitting an application. It is also wise to think about the needs of one’s business, its current financial status, and any company goals.

If a business owner applies for a term loan, a lender will offer him or her a lump sum of money. In general, a business owner can use this cash however he or she sees fit, including for the following business expenses:

• Real estate
• Equipment
• Inventory
• Payroll
• Cash flow
• Debt refinancing
• Marketing expenses
• Expansion projects

After a business owner gets a small business loan offer, he or she must pay back the loan via fixed payments, which will include interest payments and other fees. A long-term loan requires monthly payments that last several years. That said, the loan term will depend on the specific lender’s preferences and requirements.

What Are the Pros and Cons of a Long-Term Business Loan?

A long-term business loan has the benefit of offering a lot of money, which allows a business owner to buy expensive equipment, hire more employees, and make other important investments for his or her company. When compared to short-term loans and other types of funding, such as lines of credit or SBA loans, long-term loans offer the following advantages:

• Fixed payment terms
• Lower interest rates
• Monthly payments
• Lower fees

That said, long-term business loans also have their downsides:

• Long approval process
• A lot of documentation and paperwork required
• A high credit score likely needed

Also, the large amount of money will reduce the total credit available to the business such as business dispute attorney in San Diego. This means that the business may have access to less working capital down the road.

Should a Business Owner Apply for a Long-Term Business Loan?

1. Long-Term Loan Lenders Prefer Established Companies

Because long-term business loans tend to involve big sums of money, lenders like to work with businesses that have been operating and generating revenue for at least a few years. Generally, these lenders will have a time in business requirement. To qualify for a small business loan with a longer repayment term, a business owner will need to submit the following information:

• Annual revenue
• Monthly bank statements
• Other financial measurements over several years

Sometimes, lenders will ask to see the following information:

• Current credit card debts
• Information on outstanding loans
• Other financial measurements that might indicate the business’ health

2. Lenders Need to Be Confident in Their Investment

Generally, long-term business loan lenders prefer companies that have high credit scores. An individual’s credit score tells a lender how likely the borrower is to repay the loan on time and in full. According to Nakase Wade commercial litigation attorney in Los Angeles, there are a lot of risks associated with extended funding terms, so business lenders are mindful of credit score and business history.

Online and alternative lenders may also ask for detailed plans about how the business owner intends to invest the money in his or he business. For instance, it may be that the business owner wishes to use the money for an extensive renovation or to buy new equipment. In that event, a business owner may be more likely to see a return on their investment. Thus, a business lender can be confident that the owner will have the money to pay off the loan.

A business’ success is determined by the owner’s vision, planning, and marketing. A lender may wish to see evidence of these in the form of the following documents:

• Business plans
• Cash flow projections
• Bank statements
• Tax returns

3. Long-Term Business Loans Are a Big Commitment

When a business owner takes out a long-term business loan, he or she is entering a contract that will seriously impact his or her company’s finances. The following are a few ways in which a long-term loan can affect a business’ finances:

• Monthly payments: when a business owner is making payments every month to pay off a loan, he or she has less money to spend. Thus, a big portion of revenues may be used to repay the loan.

• Interest payments: while long-term loans tend to have low-interest rates, these can still add up to a large amount over time. It is important to consider the total cost of a loan so that the business can still afford payroll and marketing expenses.

• Inability to qualify for later financing: if a business owner gets a loan now, then he or she may have less credit available down the road. Lenders are hesitant to lend to businesses that already have unpaid debt.

One should also remember that business debt is a liability. This means that long-term debt will exist in a company’s books for a long time, increasing risks. If there is a recession, then the business could be in trouble, unable to meet monthly payments. If a business owner is not sure about their willingness to commit to a long-term loan, then they should consider short-term funding as a first option. If a business owner repays a short-term loan responsibly but needs more money, then the lender may be willing to offer a larger loan with favorable terms.

Conclusion

Prior to taking out a business loan, it is important that a business owner consider his or her company’s financial status. One must be sure they can pay back the loan in full and on time. While business loans can offer a company the funds it needs to succeed, they come with drawbacks and serious risks. It is a good idea to think about these factors before submitting an application for a long-term loan.