Long Term Loan

Find out all about long term business loans, and whether these financing solutions are a good fit for your company’s needs.

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With a term loan, a borrower is provided access to a lump sum, which is then repaid with interest over a pre-approved period of time.

As its name suggests, long term loans have the longest repayment period; while the terms will differ across lenders, these loans typically have a repayment period of up to three years. Relative to short term and medium term loans, long terms loans carry lower interest rates and monthly payments. In addition to banks and traditional lenders, these loans are also available through alternative lenders.

How can a long term loan help my business?

Long term loans are best suited for large investments. This include business acquisitions, opening up a new location, product line expansions, large scale renovations or equipment purchases - activities that impact upon the long term growth of your venture, and require financing over an extended period of time.

Is a long term loan right for my business?

The following are general requirements that can help you assess if a long term loan is a good fit for your business:

  • You have a strong borrowing profile: According to the Bureau of Labor Statistics, 50 percent of small businesses in the U.S. aren’t able to make it past the five-year mark. These companies are regarded as riskier investments, and as such, lenders typically impose strict lending criteria. For example, traditional lenders may require that borrowers have a minimum operational history of two to three years, a pristine credit history and a minimum annual revenue of $200,000.

  • You have sufficient collateral: The majority of long term business loans require that borrowers put up assets to secure the loan. But keep in mind that the lack of adequate collateral doesn’t completely diminish your chances of obtaining a long term loan, as some alternative lenders may not require collateral. In these cases, the lender will typically require personal guarantee or place a lien on your business assets.

  • You’re prepared to take up a long term commitment: With long term loans, you’re entering into a long term agreement that will have a substantial impact on your business finances. As such, you’ll need to assess your situation objectively, and weigh out the pros and cons. For example, a sizable portion of your revenue may be used up for your loan repayments, which will affect how much you have available to spend on other aspects of your business. Lenders are also less likely to offer loans to businesses that have existing debt. Should unforeseen expenses crop up in the future, you may face difficulty in obtaining the external financing you need to fund these costs.

Tips to help you prepare for a long term loan application

Provide a clear plan of action

A well-written business plan will provide your lender with a clear understanding of your business financials, where you’re headed, how you’ll utilise the funds from your loan and how you’ll make consistent, on-time payments. Here are a few tips to help you craft a plan of action that checks off the right boxes:

  • Keep it simple: Prospective lenders may not have an in-depth understanding about your business or industry, so do avoid the use of technical jargon wherever possible. If there’s a need to elaborate on complex projects or technical aspects of your venture, be prepared to present the information in a simple, easy-to-understand manner. Be sure to use layperson’s terms, along with simple graphics and images in your explanation.

  • Provide supporting documents: If you’re taking out a loan for an equipment purchase, your lender will want to have the details - such as what equipment you’re getting, the supplier that you’re getting the equipment from and why you’re making an equipment purchase. As such, it can be helpful to prepare the necessary supporting documents beforehand. This may include an invoice from your supplier, documents that show that your existing equipment is in need of replacement or images showing a malfunctioning or outdated equipment.

  • Offer multiple repayment options: Your lender may not agree with all the terms of your initial proposal, so it’s best to come prepared with two or three different repayment plans. Your backup options may include terms that weren’t part of your initial proposal, such as the use of assets as collateral or a different repayment schedule.

Build up your personal credit score

Having a pristine personal credit history is an important factor of consideration in long term loan applications - particularly for newly founded SMEs without an established credit history. That’s because it shows that you’re able to manage your personal finances well - which is an indirect indicator that you’ll handle your business finances in a similar manner, and be reliable with your repayments.

If your personal credit score isn’t yet where you want it to be, here’s a few steps you can take to get started on improving your score:

  • Be timely with bill payments: This tip may seem obvious - yet it’s something that small business owners may easily overlook. Scheduling monthly payment reminders or setting up automatic payments through PayPal or credit card can help prevent payment slip-ups.

  • Keep a close eye on your credit reports: At the very least, you should be checking your credit report once per year. Be sure to report any mistakes you’ve discovered immediately, as even minor errors like miscalculations can have an impact on your credit score.

What are small business financing options I can explore?

Long term loans are a great option if you’re looking to finance large investments and growth initiatives that have a longstanding impact on your venture. If you’re seeking SME funding to cover unexpected expenses, make inventory purchases or overcome seasonal fluctuations, short term financing solutions - such as a short term loan, line of credit or invoice financing - can be a better fit for your needs.

While these financing solutions are offered by banks and traditional lenders, the stringent lending requirements imposed can make it challenging for small businesses to qualify. Here’s where alternative lenders come in. Offering greater flexibility, streamlined processes and quick access to funding, these platforms can be a viable option for small business financing needs.

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