Long-Term Business Loans: Compare Your Options

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What is a long-term business loan?

A small business loan that typically lasts three to 10 years is called a long-term loan. When a business is ready to make a significant investment in future growth, long-term business loans are a common way to fuel that progress. Term loans allow companies to afford large outlays by paying little by little over time. This can include purchasing new manufacturing equipment or remodeling facilities. Without a term loan, many businesses would not be able to take that important step from financially focusing on short-term survival to planning for long-term growth.

How does a long-term loan work for small businesses?

In most cases, long-term business loans are used to purchase something specific that will enable the company to grow and make more money. Machinery, vehicles, commercial real estate and hiring new staff are examples of what you could use your loan for. The rule of thumb is that the loan term should be as long as or shorter than the useful life of the investment — for example, you wouldn’t want to have to get a new work van before you’ve paid off the loan for the older one.

The average size of a business loan from an online lender or U.S. bank ranges from $5,000 to nearly $600,000, though loan amounts can be more or less than the average. Businesses receive a lump sum of the total loan amount after they receive approval. They must pay back the amount of the loan with interest in periodic payments over the term of the loan.

Your company’s existing collateral often supports long-term business loans. This means that, should your business default on its loan payments, the lender will be able to recoup some of the expense by selling off business assets like inventory, real estate or vehicles. Without collateral, a robust business history and a solid credit score, it may be difficult for you to secure a long-term loan.

Long-term vs. short-term loans

If you’re looking for a lump sum of funding that could be repaid quickly, short-term loans may be a more attractive option than long-term loans. Like long-term loans, short-term loans provide upfront funding you can pay back in installments over time. Here are a few characteristics of short-term loans:

  • Repayment terms between three and 18 months
  • Daily or weekly payments
  • Lenient borrower requirements compared to long-term loans
  • Higher interest rates compared to long-term loans
  • Time to funding within one to two business days

While long-term loans are designed for future investments in the business, short-term loans are better suited for immediate financial needs. For instance, you could use a long-term loan to purchase an expensive piece of equipment and rely on a short-term loan to fund payroll during a seasonal slowdown.

Options for long-term business loans

One size does not fit all when it comes to term loans. There are a number of options and different types of lenders that offer business loans with longer terms. Here are a few places to look for long-term business loans.

SBA loans

The U.S. Small Business Administration (SBA) partners with financial institutions to guarantee loans for small business owners. An SBA guarantee reduces risk for lenders, making it easier to approve borrowers who may not otherwise qualify for financing.

The SBA 7(a) loan program offers several types of general financing for businesses. Repayment terms are up to 25 years, depending on the type of 7(a) loan you choose and what’s being financed with the loan, such as equipment or real estate. SBA 7(a) loan amounts range from less than $25,000 to as much as $5 million.

Bank loans

Traditional banks commonly issue large business loans with favorable rates and terms. Repayment terms often span from just a few years to as many as 20 years. However, business owners typically need high credit scores, strong cash flow, profitability and substantial time in business to be approved for a bank loan. In addition, banks usually have slow approval and funding processes.

If you do qualify, though, you could be approved for funds that you could pay back at a manageable rate. For instance, Bank of America’s secured business loans start at $25,000, with rates as low as 3.50% and repayment terms up to four or five years, depending on the type of loan.

Online loans

Online, non-bank lenders offer both long-term and short-term loans, though their terms tend to be shorter. Repayment terms for online loans typically range from three months to five years. Amounts tend to be somewhat smaller than those of bank loans, often between $5,000 and $500,000.

Online lenders are known to charge high interest rates and fees, though borrower requirements are generally more lenient than they would be at a bank. Online lenders can also usually provide funding in a few days.

How much do long-term business loans cost?

Long-term business loans need to be paid back with interest. Rates differ based on the lender you’re working with and your loan details. If you take out a term loan from a traditional bank, your annual interest rate could range from around 2.5% to 5% or more. If you work with an online lender, you may see annual interest rates between 13% and 71%.

Additionally, a term loan will likely come with closing costs and other processing fees. Be sure to check your contract for other hidden costs like early repayment fees.

The longer your repayment term, the more likely you’ll be on a monthly payment schedule. This type of business loan may not be a good fit until you’re in a position where you have reliable cash flow and a little money to put aside each month. Defaulting on a term loan could be devastating for a business — you could badly damage your credit and lose your business and, in some cases, personal assets.

How to apply for a long-term loan

You can shop for small business loans by visiting nearby banks, contacting your local SBA office, reaching out to your city’s chamber of commerce or searching online. Once you choose a lender, the application process would likely start with some paperwork requesting basic information about your company, how much money you need and how you plan to spend it.

Next, a lender may review these basic requirements:

  • Credit score: Lenders check credit history to determine your risk as a borrower. The lower your score, the higher your interest rate may be, if you are approved. Lenders may prefer borrowers who have a personal credit score around 700, although some online lenders may accept a score as low as 550.
  • Time in business: Most lenders want to see that you’ve been in business for some time. Two years in business is often a standard minimum for term loans.
  • Business revenue: Lenders will evaluate your annual gross revenue, including all of your sales and other sources of income. Your revenue and cash flow will give lenders an idea of whether or not your business could repay a loan.

See if you qualify for a term loan

The timeline for approval and time to funding would depend on the individual lender. As mentioned earlier, online lenders are often fastest to fund loans, while traditional banks may take a bit longer.

Your term loan application may require a few additional documents. It may be helpful to have some essential information on hand before sitting down to apply:

  • Business plan
  • Business and personal bank account statements
  • Business tax returns and personal tax returns
  • Proof of business registration and licenses
  • Employer identification number
  • Profit and loss, cash flow and balance sheet
  • Proof of collateral (if required)
  • Business assets and liabilities

Pros and cons of long-term business loans

Pros of long-term business loans

  • May come with low interest rates.
  • Term loans could help build business credit
  • Manageable fixed monthly payments and fixed interest rates that allow you to plan for payment.
  • Most term loans do not specify how businesses can spend the money.

Cons of long-term business loans

  • Term loans may have a lengthy time-to-funding timeline.
  • Some businesses don’t qualify for a long-term loan.
  • Long-term business loans may have long documentation processing time.
  • Companies usually need at least two years in operation, a strong credit score and existing collateral to be eligible for a long-term loan (in most cases).