How To Find & Qualify For A Long-Term Loan For Your Small Business
You’re a business owner, and you’ve encountered a financial hurdle in the form of a large business expense. This expense could be completely unanticipated, such as the sudden breakdown of equipment, or it could be planned, such as a business expansion through improving your facilities or purchasing commercial real estate.
No matter what it is, a big expense can be difficult to pay upfront. When it’s an unexpected or emergency expense, the situation can be even worse. However, many smart business owners have found a solution for these large expenses: long-term business loans.
If spreading out the cost of a large expense over a longer period sounds appealing to you, this financing option may be the right choice for your business. However, you don’t want to rush to fill out an application with a lender just yet. Instead, do your research and boost your knowledge. Read on to learn more about the rates, terms, benefits, and drawbacks of long-term business loans.
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How Do Long-Term Business Loans Work?
A long-term business loan is a type of loan that you pay back over a longer period. The lender loans the borrower a set amount of money for business expenses, such as purchasing a commercial vehicle or real estate, buying equipment, or hiring new employees.
With the help of a long-term loan, the business does not have to pay a large sum out of pocket. Instead, a lender will provide the needed funding, which the business will pay back in fixed amounts over several years, along with interest and fees.
What Term Lengths Can I Get With A Long-Term Loan?
The term lengths of a long-term loan vary based on a number of factors, including the loan amount, the lender’s policies, and how the funds will be used. In general, most long-term business loans have terms between three and 10 years. However, some long-term loans, such as those used to purchase commercial real estate, may have repayment terms of 20 years or more.
What Kind Of Interest Rates Can I Expect From A Long-Term Loan?
Like other business loans, long-term loans do not come with set interest rates. Interest rates vary by lender, the borrower’s creditworthiness, and the amount of the loan. The most qualified borrowers with the best credit histories can often receive interest rates below 5% from a conventional lender such as a bank. Startup businesses or businesses with a poor credit history may receive interest rates of 30% or more from alternative lenders.
Who Qualifies For Long-Term Business Loans?
Requirements to qualify for a long-term business loan vary by lender. However, there are a few general requirements set by most lenders.
Anyone applying for a long-term business loan must have a legitimate business expense that will be paid using the loan proceeds. The borrower must own at least 20% of the business. All borrowers must have a minimum credit score of 600, although higher scores are required to receive the best terms and interest rates. Most conventional lenders also require a business to be in operation for a minimum of two years.
There are also annual revenue requirements that must be met. Most larger loans exceeding $100,000 typically require collateral. Even when specific collateral is not required, a personal guarantee or blanket lien will usually be part of the loan contract.
Can I Qualify For A Long-Term Business Loan If I Have Bad Credit?
Banks and other conventional lenders often have high credit score requirements, lending only to borrowers with scores in the high 600s or above.
Many lenders will also look at credit history and not just the credit score. Bankruptcies, foreclosures, or defaults on past loans can all disqualify borrowers from receiving long-term loans.
For borrowers with bad credit, alternative lenders may be an option. These lenders will approve borrowers with scores as low as 500. However, interest rates will often be much higher for these borrowers.
Borrowers with scores below 600, or those that want to lock in the best rates and terms, should pull their free credit report and score, work to pay off current debt, and take additional steps to boost their scores before applying for a long-term business loan.
Are Startups Eligible For Long-Term Loans?
Most conventional lenders want to work with businesses that have been in operation for more than two years. For startups and new businesses, getting long-term funding can be challenging, but it isn’t impossible.
While new businesses may not qualify for traditional bank loans, there are other options. Small Business Administration programs, for example, provide funding opportunities for startups. Alternative lenders are also less stringent with their time in business requirements.
Applicants should be prepared to show that the business will be able to pay back the loan. Instead of providing traditional documentation (such as income tax returns), business plans and future projections may be required by the lender during the application process.
When Would A Business Need A Long-Term Loan?
There are many situations where a business might need a long-term loan. In fact, just about any large business expense could be covered via a long-term loan, including:
- Business expansion
- Improvement or remodel of existing facilities
- Purchase of commercial real estate
- Business acquisition
- Purchase of commercial vehicle or vehicles
- Purchase of expensive equipment
- Purchase of inventory or supplies
- Hire new employees
- Refinance existing debt
The important thing to remember here is that long-term business loans can be used for just about any business purpose. However, the loan’s overall cost (including fees and interest) should always be taken into consideration. The return on investment should always outweigh the loan’s cost, and a long-term loan should only be accepted if the extra funding will help the business grow and be successful.
Pros & Cons Of Long-Term Business Loans
When there’s a need for a loan, it’s easy to get blinded by the prospect of money without really thinking about the benefits and drawbacks of borrowing. Smart borrowers look at the long-term pros and cons of taking out the loan to determine if it will truly benefit the business.
- Small Monthly Payments: Large expenses can be broken down into affordable monthly payments by taking out a long-term business loan.
- Low-Interest Rates: Borrowers with the highest credit scores can take advantage of interest rates of less than 5%, making this one of the most affordable loan options.
- Debt Consolidation: Borrowers that use long-term loans to consolidate or pay off high-interest debt can save thousands of dollars over the course of the loan.
- Variable Interest Rates: Some long-term loans come with variable interest rates, so be cautious. While a variable rate may help you save money when market rates fall, there is always the possibility that rates could increase, leading to a more expensive loan.
- Overall Costs: The overall cost of a loan over its lifetime can be quite expensive, especially for any borrower without a stellar credit rating. Even for the most qualified buyers, fees and interest can really tack on extra money to the loan, so it’s important to fully understand the total cost of the loan before signing the contract.
- Collateral Requirements: For most long-term loans, collateral is required. In some cases, the collateral will be the item being purchased with the loan proceeds, such as equipment, a vehicle, or real estate. In other instances, borrowers will need to put up business assets, personal assets, sign a personal guarantee, or agree to a blanket lien before the loan is disbursed.
- High Credit Score Requirements: A long-term loan can be one of the most difficult loans to obtain. A great credit score (with no negative items on your credit history) is required to get the most affordable funding. While some lenders may work with borrowers with lower scores, interest may be much higher and terms not as favorable.
- Documentation Requirements: Because long-term loans are often for very large amounts of money, lenders want to ensure that all borrowers can pay back the loan. This means that there is a lot of paperwork involved in the application process. Borrowers must come prepared to take the time needed to provide the lender with all documentation to qualify for the loan.
- Long Approval Process: Depending on the lender, getting approval for a long-term business loan could take months — not ideal for a business that needs immediate funding.
Where To Find Long-Term Business Loans
Once a business decides to take the leap to obtain a long-term loan, the next step is to apply with a lender. Fortunately, it isn’t difficult to find a lender that specializes in long-term business loans. Most business owners turn to three main sources for their long-term financing needs: the Small Business Administration, banks and credit unions, and alternative lenders.
The Small Business Administration (SBA)
The Small Business Administration provides lending programs that are a hit with business owners. The SBA sets guidelines that keep interest rates low for borrowers while also providing a guarantee to lenders. Because of this guarantee, SBA-approved lenders, or intermediaries, are more willing to loan money to small businesses.
The SBA offers several long-term loan programs. The most popular is the 7(a) program, which offers up to $5 million for almost any purpose with a maximum repayment term of 10 years. Falling under the 7(a) umbrella is the Community Advantage Loan that offers the same competitive rates and terms for businesses in underserved communities, while the Veterans Advantage program offers long-term loan options for military veterans and service members.
The SBA Microloans program is another option for smaller financing needs. These loans provide up to $50,000 that can be repaid over a maximum term of six years.
For businesses that want to improve their facilities or purchase real estate, 504 loans provide 40% of funding toward these projects. A maximum of $5 million can be distributed through this program, with repayment terms set at a maximum of 25 years.
SBA loans can be obtained from intermediary lenders, including SBA-approved banks, credit unions, nonprofit agencies, and Commercial Development Companies. Learn more about the rates, terms, and requirements of SBA loan programs.
Small business loans that can be used for many many business purchases, such as working capital, business expansion, and equipment, inventory, and real estate purchasing.
Small loans, with a maximum of $50,000, which can be used for working capital, inventory, equipment, or other business projects.
Large loans used to acquire fixed assets such as real estate or equipment. 504 Loans are offered in partnership with Community Development Companies (CDCs) and banks.
Loans used to rebuild or maintain business following a disaster.
Banks & Credit Unions
Banks are a very popular source for obtaining long-term business loans because of low-interest rates and favorable terms. However, qualifying for these loans can be difficult. Credit scores must be very high, the application and approval process can be lengthy, and banks often have strict requirements in terms of time in business and annual revenues. Businesses that do qualify, however, will find bank loans are easily one of the most affordable loans on the market.
Credit unions also offer very competitive rates and terms, and many businesses prefer to work with these lenders because of the more personalized service they receive. Credit unions may have a bit of flexibility in terms of their requirements, but all borrowers should come to the table with a high credit score and a stable business history.
Businesses pursuing these types of loans can start with the financial institutions where they have already established accounts. Businesses that would rather shop around for the best rates and terms can check out our top banks for business loans to get started.
Alternative lenders offer some benefits that banks, credit unions, and SBA intermediaries do not, including fast approval and funding and lower credit score requirements. However, there are also several drawbacks to working with alternative lenders. Higher interest rates are one of the biggest drawbacks. Lower maximum loan amounts are another. Learn more about the benefits and drawbacks of alternative loans.
Most alternative lenders set their maximum repayment terms at five years. Depending on the amount borrowed, this could mean higher monthly payments, especially with higher interest rates that can even exceed 30% in some cases.
However, the return on investment may be enough for a business to move forward with one of these loans. These loans are best for businesses that don’t meet other lenders’ qualifications, including but not limited to credit score, time in business, or annual revenue.
Long-Term Business Loan Calculator
It is absolutely critical to understand the full cost of a long-term business loan prior to signing your loan contract. Before borrowing, use our loan calculator to get an overview of what to expect. This calculator provides estimates of monthly payments, the total amount of interest that will be paid, and the total cost of the loan. Knowing the numbers before applying for a loan is a key step for any financially-savvy business owner.
Learn more about the loan calculator and how to best use it before applying for a long-term business loan.
Long-Term Business Loan FAQs
A long-term business loan can be a smart and affordable way to fund large expenses. However, to get the most out of this type of financing, it’s important to do your research to find the lowest interest rates and best terms. Evaluate why you need the money and the return on investment, then find the lender that offers a loan that best fits your needs.