What, When and How to get A Long Term Business Loan
There are many reasons and situations where a long term business loan is the right move for a business. Using deficit financing can be an effective way to manage growth and improve profitability through the ups and downs of the business cycle.
A long term business loan is simply a loan that has a payback period that is over 3 years and in most cases less than 25 years.
The long term loan for business is characterized by a term that is from 3 to 25 years. It is usually paired to a specific business asset that has a lifetime that is equal to the loan repayment period.
Most lenders prefer not to extend the payback period past the lifespan of an asset.
The interest rate can be set at variable or fixed with the usual trade off in costs. Long term business loans can also be offered with a balloon payment at a determined point in time. This method can be used to reduce interest cost.
Loans can also be given as a long term secured loan or a long term unsecured loan. As a rule any long term business loan that is unsecured will get a shorter repayment period and will require very solid financials and a good relationship with your lender.
Most cases lenders will only consider long term business loans that are secured.
A longer term loan increases a lenders risk, so the lender will require more documentation to mitigate that risk
If you don’t fit into these situations review the other type of term loans
There are many other types of loans that may also fit your needs read more
A Long Term Loan Solves A Multitude of Issues
Many businesses must deal with day to day and long term problems. These problems are the result of market changes, competitors, upgrades to critical equipment.
Most of these businesses look to long term financing as a way to buy equipment, fund large inventory purchases related to product launches, facility improvements or acquisitions. Also long term business loans are often used to acquire other businesses.
An exception to this is a startup or new business that is eligible for SBA7a loan. This loan type is intended to help a new business get going so these lenders tend to be more flexible as to how funds will be used. As a rule lenders that provide a startup business loan will require a full business plan.
A new business may used these funds to handle initial operating expenses, inventory, equipment, marketing, lease payments ect…
check out the 5 things to make the best choice for term loans
What Kind of Business Gets Long Term Financing?
Any business at any stage can apply for a long term loan. Long term debt financing is often key to allow a business to purchase needed equipment with the ability to maintain positive cash flows.
Two main categories that receive this type of loan
- A startup or a business that has been operating for less than five years
- A business that has been in operation for more than 5 years.
- The startup’s only option for a long term start up business loan may be through the SBA 7a program, because the risk is too high for traditional lenders.
2. The mature business can often access long term debt financing because of its financial stability and history.
When to Get a Long Term Loan
When considering if you should access long term business financing the first thing you need to consider is what you are trying to finance and the risk that the debt burden will be more than the company can afford.
To help determine this you should conduct a cost of capital analysis that would include the present value of capital.
If the analysis is in your favor then as soon as you know what asset you’ll be acquiring to get the financing. You can preload the loan application so you’ll be ready when the time comes.
Be aware that too far in advance the lender may change their mind and you’ll have to start over.
How to Get Your Long Term Business Loan
In general you should be prepared to provide detailed financials.
Factors that make difference on what lenders require:
- Are you a startup (read a startup gets financed)
- Have you been in business for 5 years or more (financial documents required for long term financing)
- Credit score (how to get your real credit score)
- Bank relationship (how to develop a banking relationship)
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