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During the COVID-19 pandemic, owning a small business can be especially challenging. On top of managing business operations, you also need to monitor the wellbeing of your staff. That’s a lot to think about. If you need support for your small business during COVID-19, there is assistance available through the Small Business Administration's (SBA) coronavirus relief options, which include EIDL Loan, SBA Express Bridge Loans, and SBA Debt Relief. Long-term business loans are those with terms that typically are between three and 10 years. The money you borrow from a lender, plus interest, is to be paid back in-full by the end of the specified term, usually in monthly installments. Because payments are spread out over longer periods of time, long-term business loans may allow borrowers the flexibility of more manageable payments or favorable interest rates, since the payments are extended over a long period of time.In contrast, short-term business loans and other short-term financial products typically have terms that are less than three years with smaller loan amounts to help manage daily expenses, monthly cash flow, and other immediate business needs. Repayment terms vary depending on the product, but typically installments are made more frequently than a long-term small business loan and typically carry very high interest rates.Regardless of whether you need short- or long-term financing, it’s important to understand the differences, and the numerous options available, which can help you make the wisest financial decisions for your business.In this guide, we’ll offer insight into:
- The basics of long-term small business loans, including typical eligibility requirements, use cases, rates, and terms.
- The pros and cons of long-term financing options.
- Short- versus long-term business loans.
- Types of long-term loan options for your business.
- How to apply for a long-term small business loan.
- Alternatives to long-term business financing.
What Is a Long-Term Business Loan?Long-term small business loans offer borrowers larger sums of funding to support the growth of their business. While there isn’t a formal definition of a long-term loan, three to 10-year business loans are common, and some may even extend to 25 years, depending on the program. Long-term loan terms may vary slightly depending on the lender’s eligibility requirements and the borrower’s needs. Some lenders may offer equipment loans or other specialty financing that have terms specific to the loan’s use, while other long-term small business loans may have terms dependent on the borrower’s qualifications and loan amount. The following are a few common characteristics of long-term business loans:
- Higher loan amounts than short-term business loans
- Lower interest rates compared to short-term financing
- Collateral is often needed
- Qualifications will vary by lender but generally include an established business history, a strong credit history, and proof of financials
Long-Term Business Loans UsesSmall businesses typically choose long-term financing to cover larger investments that support the growth of the business. Since long-term business loans have longer repayment terms, they aren’t typically used for emergency expenses or cash flow issues. Long-term small business loans may be useful for the following purposes:
- Real estate purchases
- Building renovations
- Equipment financing
- Debt refinancing
- Purchasing another business
Who is Eligible for a Long-Term Business Loan?Some of the major differences between short-term and long-term business loans are the eligibility requirements. Since long-term loans may be for larger sums of money and require payments over a longer period of time than short-term loans, they equate to more risk for lenders. Because they present more risk, long-term business loans may be more difficult to qualify for than short-term financing options.Generally, lenders want to see proof that your business is capable of taking on long-term payments. That means that you may need to provide more documentation that shows your business’s credibility as a borrower than you would for a shorter-term loan.While eligibility requirements for long-term loans may vary based on the financial institution, businesses that meet the following criteria may be eligible for long-term business loans:
Lenders will also generally assess your debt-to-income (DTI) ratio to evaluate how much debt you are carrying in proportion to your annual revenue. Carrying a large sum of debt, may affect your ability to qualify for a long-term small business loan.
- Businesses that have been established for more than 2 years
- Those with strong business and personal credit
- Businesses with a proven track record of generating revenue
- Businesses with collateral to offer
- Borrowers who own a large percentage of their business
Typical Rates and Fees for Long-Term Small Business LoansRates and fees vary depending on the type of long-term loan you choose and what the lender determines you’re eligible for, but typically, the annual percentage rate (APR) is lower for long-term loans vs. short-term loans. Interest rates for long-term business loans generally range from 6% to 25%, depending on the type of lender and terms. Banks are known for having lower rates, as are SBA loans, for well-qualified borrowers—while online lenders typically have higher interest rates in comparison.In addition to the interest rate, there may be fees associated with your long-term business loan:
- Application or origination fees: Charge for processing your application and setting up the account
- Underwriting fees: Help cover costs of verifying documents and credit reports
- Prepayment Penalties: Some lenders may charge fees if you pay back the loan early
- Service fees: Cover ongoing costs related to your account
- SBA loan guarantee fee: If you get an SBA loan, they have a guarantee fee of 0.25% to 3.75% depending on the size of the loan. The guarantee fee is charged to the lender, but can be passed on to the borrower.
Who Offers Long-Term Business Loans?You may associate long-term business loans with traditional banks or credit unions, but there are a growing number of alternative lenders who offer online business loans. Banks and credit unions may be able to offer better rates and terms to well-qualified borrowers, but also usually have more stringent loan qualifications than online lenders.
What Are Common Long-Term Business Loan Terms?Business loan terms vary depending on the type of lender, loan amount, what the funds are being used for and borrower qualifications. Generally, long-term business loans range anywhere from three to 25 years, though some terms may be shorter or longer. Loans through the SBA often have the longest terms, while alternative lenders typically have terms less than five years.
Pros and Cons of Long-Term Business LoansLenders offer financing that can be useful for a number of small business investments, but there may be times when a short-term option may be preferable to a long-term loan. Before making any final decisions on whether to choose a long-term small business loan or short-term financial product, check out some pros and cons for long-term financing.
Pros of Long-Term Lending Options
Longer Loan Terms Make for Lower PaymentsBorrowers may consider a long-term business loan because they typically offer lower installment payments than a short-term loan. Even if you borrow a significant amount of money, you may be able to work with the lender to choose a loan repayment term that can accommodate your business’s needs. Of course, longer terms mean more payments which means paying more in interest over the life of the loan.
Lower Interest RatesChoosing a long-term business loan doesn’t guarantee a lower interest rate, but in general, long-term business loans offer better rates than short-term loans for well-qualified borrowers. Interest rates may also be impacted by the borrower’s credit history and other factors. Securing favorable terms can help lower your monthly payments or make the loan less expensive in the long-term.
Monthly PaymentsNot every lender will have the exact same repayment schedule, but long-term small business loans are typically paid in monthly installments. In contrast, short-term loans may have repayment terms that require borrowers to repay weekly or bi-weekly, depending on the loan product. Monthly installments can give borrowers more flexibility with cash flow since they’re not needing to make payments as frequently.
Lower FeesLong-term business loans may have fees, but generally not as many as short-term financial products, like invoice factoring or merchant cash advances. Costs like factoring fees, bank wire fees, or invoice processing fees are more common with short-term funding options and can add on to the cost of the loan significantly.
Cons of Long-Term Business Loans
Longer Approval ProcessSince long-term loans are often for larger sums of money, the approval process can be more rigorous to ensure that borrowers are capable of paying back the loan on time. For example, you may be required to provide a form of collateral and prove a history of strong revenue performance to secure the loan. While this may be accessible for a well-established business, small business startups or those with limited credit history may struggle to qualify for long-term business loans. Lenders may also take longer to review applications for long-term loans. If you need funding quickly, a long-term business loan may not be ideal since time to funding could be longer than your business can withstand.
Need Strong CreditLong-term small business loan lenders typically require borrowers to have a strong credit history, generally a credit score of around 600 or higher is preferred. If you have less than stellar credit, it may be difficult to secure a long-term business loan, especially from a bank. Online lenders may offer more options for long term business loans for bad credit, but interest rates are often higher than interest rates available from traditional lenders.
More Documentation to Prove CreditworthinessIn addition to credit scores, lenders likely want to see more documentation that shows your business’s credibility. They may want to see profit and loss statements, bank statements, tax returns, and other proof of revenue and business history.
Total Cost Can Be HighIt’s important to note that while interest rates may be relatively low on long-term small business loans, interest will accrue over the life of the loan, which can be expensive. Consider the total interest you will be charged over the life of the loan to evaluate.
Long-Term vs. Short-Term Business LoansNow you know the pros and cons of long-term small business loans, but how do they compare to short-term financing? Use the chart below for a breakdown of long- vs. short-term business loans so you can make the right choice for your needs.
Types of Long-Term Business LoansUnder the umbrella of long-term business loans, there are a number of options offered by lenders and the U.S. Small Business Administration (SBA) to assist businesses as they scale and grow. Below are common types of long-term loans for small businesses.
SBA LoansThese highly sought-after loans are backed by the U.S. Small Business Administration and offered by banks and other approved lenders. For borrowers that qualify, an SBA loan can be an option to consider if you’re in need of a long-term small business loan. However, getting approved for an SBA loan can be a competitive, long process, because of their favorable rates and terms, and backing by the SBA. The SBA 7(a) and SBA 504 loan programs offer long-term financing for qualified small businesses. Depending on the amount of funding you need and what it will be used for, one program may be more suitable for your needs than the other:
- SBA 7(a): Long-term small business loans that can be used for nearly any business-related purchase. The maximum loan amount is $5 million, and loan terms may extend up to 25 years, depending on what the funds will be used for.
- SBA 504: Small business loans aimed at helping businesses renovate or modernize their operation. The funds can be used for purposes like purchasing new land, remodeling, or buying new equipment. The maximum loan amount is $5 million and loan terms can extend up to 25 years.
Term LoansA term loan is a type of long-term business loan. With a term loan, your business receives a fixed amount of money for which the lender sets a specified repayment schedule. You pay back the amount borrowed plus interest in installments over the agreed-upon term. The business loan term is based on a borrower’s qualifications, loan amount, and other conditions set by the lender.
Business Line of CreditA line of credit can be used by businesses of all sizes to help manage cash flow and other working capital expenses. A creditor gives you access to funding up to an approved amount with interest only charged on unpaid balances. Repayment terms for a business line of credit differ from traditional loans because borrowers are not charged interest on the whole amount they’re approved for; you only pay interest on what you spend, similar to a credit card.Some lines of credit end once the entire amount is borrowed and paid back in-full, while others are known as revolving credit. With revolving lines of credit, the approved credit limit replenishes after the balance is paid in full, allowing borrowers to have access to funds for extended periods of time.
Equipment FinancingLong-term equipment financing can be an option to consider for well-established businesses that want to invest in equipment. This may include machinery, vehicles, medical devices, and office equipment. With this type of loan, the equipment itself acts as collateral.Loan terms can range from several months to 10 or more years. They may match the amount of time a business expects to make use of the equipment. The potential benefit of purchasing expensive equipment with a 5-year business loan, for example, comes if your business can still get the items it needs to function and grow without the financial stress of a large, one-time purchase.
Commercial Real Estate LoansA commercial real estate loan allows you to purchase a building or other property that’s to be used for business purposes. This may include office space, a retail shop, factory, or warehouse. The property being purchased acts as collateral, which could be beneficial to businesses that don’t have other forms of collateral to offer. The loan amount you’re approved for will depend on the loan-to-value (LTV) ratio: the size of loan compared to the value of your property. Commercial real estate terms will vary based on factors including the loan amount, borrower qualifications, and lender requirements.A commercial real estate loan can help businesses grow by enabling borrowers to purchase the space they need to increase production and sales. Similar to equipment financing, these long-term business loans allow business owners to make large real estate purchases without the financial strain of paying for the property all at once.
Applying for a Long-Term Business LoanPreparation is key when learning how to apply for a business loan. Lenders typically require extensive documentation as part of the application and approval process, so it may be helpful to have a game plan as you are preparing to apply. Generally, you will need to take the following steps to prepare and apply for a long-term business loan:1. Understanding qualifications: As you start to research lenders, take note of their minimum qualifications. Businesses that may be eligible for long-term business loans will typically:
2. Checking your business and personal credit: This could help you determine what you may qualify for, which can be particularly important for long-term business loans that may require a higher credit score than some shorter-term financing options. 3. Preparing documentation: Applying for a long-term small business loan will usually require more documentation than a short-term business loan. Lenders may ask you to provide documents like:
- Be well-established and in business over two years
- Have strong personal and business credit histories
- Be able to show proof of annual revenue
4. Choosing a lender: Compare lenders based on factors including how much funding you need, your business goals, and your qualifications as a borrower. To help get organized and start narrowing down your options, it may be helpful to answer the following questions:
- Personal and business tax returns
- Personal and business credit scores
- Profit and loss statements
- Business licenses, permits or other legal documentation
- Personal and business bank statements
- Documents for proof of collateral
5. Applying: After you’ve chosen a lender, you would fill out the application and provide any required documents. Some lenders may allow you to pre-qualify for a loan, by performing a soft credit pull, which won’t typically impact your credit scores. When applying, lenders may perform a hard credit pull, which may impact your credit score.
- How much financing do I need?
- What is the money being used for?
- How soon do I need funding?
- Can I honestly afford a long-term loan?
Additional Funding Options for Small BusinessesIf you’re looking for additional financing options for business-related expenses, the following options may be worth considering.
MicroloanTypically, microloans are offered by nonprofit organizations and peer-to-peer lenders for smaller loan amounts. If you only require a small amount of financing, and don’t qualify for a larger loan, a microloan may help you get the funding you need to cover basic expenses. SBA microloans are also available and may have advantages like longer terms and better interest rates than other short-term lending options.
Peer-to-Peer (P2P) LendingPeer-to-peer lending removes the financial institution that typically facilitates the loan process, allowing borrowers and investors to connect directly. Borrowers may find more favorable rates and simpler terms than other lending options.Online P2P networks help match borrowers and investors based on your business needs and purpose. After the loan is approved, money transfer and payments occur directly through the P2P platform.
Inventory FinancingInventory financing is an asset-based business loan used to purchase more inventory, which can help maintain consistent cash flow during seasonal spikes in sales. The inventory itself serves as collateral and lenders offer financing based on a percentage of that inventory’s value. If you default on the loan, the lender can seize the inventory that you’ve used as collateral.
Compare Long-Term Business Loans with Lantern CreditManaging your small business comes with a lot of responsibilities and spending time trying to find a long-term business loan shouldn’t consume your days. At Lantern Credit, we help simplify the process of finding the right lenders for your business needs so you can have more time to manage your business and succeed.You can find small business financing options based on your needs and qualifications all in one place, eliminating the stress of shopping around for lenders. If you’re ready to grow your business, we’ve got many long-term business solutions for you to choose from.
The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website on credit (https://www.consumer.ftc.gov/topics/credit-and-loans)SOLC20060
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