The benefits of long-term loans, like an SBA loan with a 10-year term, can help you expand your business.
Long-term debt includes loans along with other financial obligations lasting more than one year. Terms of long-term debt can stretch to 20 or 3 decades with respect to the individual lender and use of funds. Long term loans have an additional advantage: low monthly obligations. This provides a business sufficient time to grow, increase income, and repay the borrowed funds.
Here's what you ought to know if you're seeking funds to develop your business or cut costs.
What are long-term loans?
Long-term business loans really are a type of business financing with repayment relation to at least 12 months. Most long-term financing options offer repayment periods of three to Ten years, though longer terms – up to Twenty five years – can be found.
The primary distinguishing features of long-term business loans are their length. They otherwise mostly resemble other loans: You'll repay your loan in monthly installments, with interest, with time. Your loan's permissible uses will be different in line with the provider, as will the required qualifications. Some long-term loans might be inaccessible to borrowers with bad credit histories, yet others might solely permit funds usage toward equipment financing.
Benefits of long-term business loans
Build business credit
The SBA cites not being able to obtain funding as a leading cause of small company failure. Having excellent business credit is vital to acquire long-term debt funding with reduced rates. For those who have obtained long-term debt financing, you increase the probability of qualifying for further funds. A 10-year term SBA loan from banks in the SmartBiz network can help your business build credit. Being an added benefit, when you build your company's credit, you lessen the have to depend on your individual credit.
To secure the lowest cost capital using the longest terms and manageable payments, keep the credit scores healthy. The SmartBiz Blog includes a host of resources that will help you understand and manage your credit ratings:
Personal Credit Scores: Important when Seeking a Small Business Loan
FICO SBSS: What's Your company Credit Score?
Long-term debt fuels growth
Some growth-building purposes of long-term debt include buying inventory or equipment, hiring new workers, increasing marketing, shoring up income, and more. For articles about real SmartBiz customers who are growing with long-term SBA loans, visit the Business Story portion of the SmartBiz Small company Blog.
Long-term debt can save a small business money
Often, small business owners rely on expensive debt – like charge cards with sky-high rates or cash advances – to have their business off the ground. Unfortunately, this type of debt cuts into income and may negatively affect day-to-day operations. A long-term loan may be used to help small business owners refinance existing high cost debt.
SmartBiz customer Milton Martinez used this strategy by taking out a low-cost SBA loan. He says, \”By eliminating two small loans I'm saving $15,000 – $18,000 dollars overall. That's money I can put back to growing my company or into savings.\”
Long-term debt can eliminate reliance upon expensive debt
There are lenders who use aggressive sales tactics to get businesses to get short-term payday loans. Some businesses looking for funds will take five or six cash advances in a row. These loans can trap a borrower into a dangerous debt cycle. Instead, consider a loan with low interest rates, long terms, and low monthly payments. Many SBA loans don't have any prepayment penalties. SBA loans may be used to help small businesses refinance existing high-cost debt if you are caught in a trap.
Drawbacks of long-term business loans
Businesses should be established
A long-term loan may be unrealistic if you're just getting started. SBA loans from banks within the SmartBiz network require 24 months of operation.
Rigorous approval process
More documentation are usually necesary to exhibit the overall financial health of the business. As such, the approval process for long-term loans may be more than for a shorter-term loan. If you want funds quickly or want to hop on a business opportunity, a short term may be best. Qualifying might be difficult too: Lenders usually require strong credit ratings and evidence that payments can be made entirely on time for that lifetime of the loan.
Collateral might be required
Collateral is something pledged as to safeguard repayment of the loan, to be forfeited in the event of a default. In terms of the types of acceptable assets, these may include inventory, a personal possession, a / r, equipment, real estate, machinery, and general intangibles that aren't already held by another lender. Newer businesses might not have required collateral.
Though interest rates in many cases are lower, the borrower may end up paying more in interest as the repayment term is a lot longer.
Considerations for approval of a long-term loan
Before you seek small company funding, you need to determine whether your financial circumstances indeed mean you be eligible for a a long-term loan. Doing so means looking at your credit history, your present finances, and how you will employ your funding. It also means assessing your financial stake in your small company and verifying all your insurance plans. Learn to handle each one of these steps below.
1. Examine your cash flow and credit scores
Lenders will examine your money flow and operating expenses. Income statements help small business owners identify liquidity, the strengths and weaknesses in terms of the cash flowing in and out of accounts. Do you have a steady business income which will ensure payments are timely? Lenders also strongly consider your business and personal credit.
2. Consider your track record
An established business with many years of success will often come with an easier time obtaining long-term loans. A company which has struggled might find it harder to acquire business funding.
3. Assess your stake within the business
Lenders may wish to see that the owner is personally committed to a company before approving a business loan. Some lenders may need that borrowers possess a minimum number of the company in question. If you do not meet this threshold, you could attempt applying for different types of loans or ask one of your co-owners to apply.
4. Prepare to present your planned utilisation of the proceeds
The lender may wish to know what these funds are employed for and why it's needed, whether it's for getting equipment or working capital or debt refinance. This part of applying for long-term loans is particularly important, as most loans limit how you can use their. Unlike charge cards, you can't necessarily use loans freely. For example, you cannot use SBA microloans, to pay debts or buy real estate. State your plans upfront to avoid issues.
5. Make sure your insurance is as much as date
Lenders need to make sure a business is correctly insured in the event of fire, flood or similar losses. For insurance requirements you may want to meet, look at this post from SmartBiz University: Evaluating Insurance Needs.
Types of Long-Term Business Loans
The long-term loans offered to your organization likely fall under one of three categories. Perhaps the most trustworthy type is SBA loans, that are usually associated with obtaining working capital. SBA loans are government-guaranteed, whereas bank term loans lack this assurance. So alternative loans, which frequently come from online lenders whose rates and terms might be ideal if you do not qualify for other loans.
Below is more information about all these loan types, their amounts and terms, and other considerations.
1. SBA loans up to 10 years
SmartBiz provides U.S. Small Business Administration loans of up to $350,000 having a 10-year repayment term, that make it easier to manage monthly payments. For example, a $100,000 loan by having an 10% annual percentage rate would require monthly payments of $1,424 over 10 years, as the same loan with a five-year term would require monthly obligations of $2,260.
To qualify, you will need to have been in business at least 2 yrs and produce at least $50,000 in annual revenue. You'll also need a good personal credit score of 640 or higher for loans of $30,000 to $350,000. For commercial real estate, SBA loans from $500,000 to $5 million require a credit score above 675.
2. Bank loans up to 5-7 years
If you do not qualify for an SBA loan or you want funding faster, consider a Bank Term loan* from the bank in the SmartBiz network. Bank Term loans are term loans intended to be repaid in a shorter amount of time than the 10-year term of the SBA loan. This kind of loan could be a fantastic way to obtain the funds you need to successfully grow or keep your business until you are eligible for an SBA loan.
SmartBiz will help you apply for a Bank Term loan with fixed rates for working capital, debt refinance, new equipment purchase, and more. Amounts can be found from $30,000 to $350,000.*
3. Alternative loans up to 5 years
If neither SBA loans nor bank term loans match your long-term needs, you are able to turn to alternative lenders. Their long-term business loans typically have repayment relation to for the most part 5 years. You will need to sign a personal guarantee to secure the loan, if you likely do not possess to place up collateral. Either way, alternative loans are a valid option in case your lower business income and credit rating disqualify you against other available choices.