With a term loan, the borrower is given access to the entire fund, which is then repaid with interest over a period of time previously agreed upon.
From the name we can understand that long-term loans have the longest payment period. Although the requirements vary depending on the lender, long-term loans usually have a payment period of up to three years. When compared to short and medium term loans, long-term loans have lower interest rates and monthly payments. In addition to traditional banks and 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-scale investments. This includes business acquisitions, branch opening, product line expansion, large scale renovations or equipment purchases. Ordinary large-scale investment includes activities that have an impact on the long-term growth of the business and require long-term funding.
Is a long-term loan right for my business?
Here are some general criteria that can help you to assess whether a long-term loan is suitable for your business:
- You have a strong profile as a borrower: According to the Bureau of Labor Statistics, 50 percent of small businesses in the United States cannot survive more than five years. This kind of business is considered a high risk investment so lenders usually impose strict loan terms. For example, traditional lenders usually require borrowers to have a minimum operational history of two to three years, a credit history that is blameless and a minimum income of $ 200,000 per year.
- You have sufficient guarantees: Most long-term business loans require borrowers to provide assets as collateral. However, keep in mind that your chances of getting a long-term loan do not always depend on the availability of sufficient guarantees because some alternative lenders do not need collateral. If a guarantee is not needed, the lender will usually need a personal guarantee or debt statement related to your business assets.
- You are ready to take a long-term commitment: When taking a long-term loan, you make an agreement that will have a big impact on your business’s finances for a long time. Therefore, you need to analyze the situation objectively and weigh the pros and cons first. For example, most of your income will be used to repay loans. This will affect how much you have to spend on other aspects of your business. It is less likely for lenders to offer loans to businesses that already have other debts. If unexpected expenses arise, there is a possibility that you can face difficulties in paying for the late borrowing costs.
Tips to help you prepare long-term loan applications
Give a clear plan of action
A well-written business plan will give lenders a clear understanding of your business’s finances, where you are going, how you will use the borrowed funds and how you can make payments in a timely and consistent manner. Here are some tips to help you develop a clear action plan:
- Make it as simple as possible: Prospective lenders may not have a deep understanding of your business or industry, so avoid using technical terms. If there is a need to explain complex projects or technical aspects of your business, present information in a simple and easy to understand manner. Use the term layman along with simple graphics and images in explaining.
- Prepare supporting documents: If you take a loan to buy equipment, the lender wants to see the details, such as what equipment you bought, where you bought the equipment and why you want to purchase equipment. Therefore, preparing the necessary supporting documents beforehand will be very helpful. Documents can be in the form of invoices from sellers or documents that indicate that the equipment currently in need requires replacement because it has been damaged or outdated.
- Offer several payment plans: The lender may not agree with all the terms of your initial application, so it’s best to prepare two or three different payment plans. Your backup option can include provisions that are not part of the initial proposal such as the use of assets as collateral or different payment schedules.
Build your personal credit score
Having a personal credit history that is blameless is an important factor that is considered in applying for a long-term loan, especially for newly established SMEs without a clear credit history. A good personal credit score shows that you can manage your personal finances. This is an indicator that you can handle business finance in the same way and can be trusted to pay on time.
If your personal credit score is not what you want, here are a few steps you can take to start increasing your score:
- Timely in paying bills: These tips may be very clear but this is something that small business owners often ignore. Scheduling monthly reminders or arranging automatic payments via PayPal or credit cards can prevent the possibility of forgetting and so on.
- Pay attention to your credit report: Check your credit report at least once a year, and make sure you immediately report when finding an error because a small mistake such as a calculation error can affect your credit score.
What are the funding options for small businesses that I can consider?
Long-term loans are the right choice if you want to finance large investments or growth initiatives that will have a long-term impact on your business. If you are looking for funding to cover unexpected expenses, make inventory purchases or deal with seasonal fluctuations, short-term solutions – such as short-term loans, credit limits or invoice financing – will be more suitable for your needs.
When these loans are offered by traditional banks and lenders, the tight requirements imposed can be a challenge for small businesses. This is where alternative lenders can play a role. Alternative lending platforms can be the right choice for small business needs by offering flexibility, a simple process, and fast access to funding.