5 Types of Long-Term Business Loans for Entrepreneurs
Ezra Cabrera | January 16, 2021
Are you planning to expand your small business in the future? Along with the excitement of business expansion, there are the costs and burdens that most owners experience. Expanding your business isn’t easy on the wallet, but luckily, long-term business loans can help you manage these expenses without overwhelming your cash flow.
In this article, you'll learn how long-term business loans work, their benefits, and how they can provide the financial support you need for a successful expansion. Whether you're aiming to grow now or preparing for future opportunities, understanding long-term business loans can help you make smarter financial decisions for your business.
What are Long-Term Loans?
Long-term loans are a straightforward way for your business to get financing. You’ll receive a lump sum of money upfront and repay it through fixed, regular installments (usually monthly), plus interest.
The repayment period can range from 3 to 25 years, depending on factors like your business’s cash flow, revenue, business and personal credit score, loan amount, and how you plan to use the funds. In many cases, lenders will require you to provide collateral—assets that act as security for the loan. This collateral could include things like real estate, equipment, invoices, or inventory.
Once approved, you can access loan amounts ranging from $500,000 to $5 million (for SBA loans). These funds can be used for a variety of business needs, including:
Working capital
Expanding your business
Purchasing inventory and supplies
Covering payroll
Hiring new employees
Renovating or improving your facilities
Acquiring another business
Buying equipment
Refinancing existing debts
Business lenders typically offer competitive interest rates because long-term loans have extended repayment periods. If you offer valuable collateral, you may even qualify for lower rates thanks to the added security.
How Do Long-Term Business Loans Work?
1. Apply for the loan – You must submit an application showing your business’s financial health, credit score, and how you plan to use the money.
2. Get approved – If approved, you’ll receive a lump sum of money that can be used for business expenses like equipment, renovations, or expansion.
3. Repayment – You’ll pay back the loan in fixed monthly payments over a period of time, which can range from 3 to 25 years. Each payment includes part of the loan amount (the principal) and interest.
4. Collateral – Lenders may require collateral, such as real estate, equipment, or inventory, to secure the loan. If you don’t repay, the lender can take the collateral.
A long-term business loan is ideal for covering large expenses like business expansion, equipment purchases, or refinancing debt, giving you time to pay it off gradually.
Types of Long-Term Business Financing Programs for Your Business
The SBA loan 7(a) and the CDC/504 loans are perfect for small businesses looking to buy new equipment, purchase real estate, or renovate a property. This type of long-term SBA loan has repayment terms that can last up to 25 years, depending on the amount borrowed. The SBA long-term loan amounts available range from $100,000 to $5 million, with interest rates starting at 8.5%.
To be eligible for an SBA long-term business loan, you must meet the following requirements:
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Good credit background
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No history of default payments for government-backed loans
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Must be in the business for a minimum of 2 to 3 years
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Show that you’ve exhausted all financing options
Pros and Cons of a Long-Term Business Loan
Long-term business financing allows businesses to access larger amounts of capital with more manageable monthly payments. However, it’s important to weigh both the benefits and challenges before making a decision.
Pros:
Lower Monthly Payments
Long-term business loans spread out repayment over several years, so you’ll have lower, more manageable monthly payments. This helps maintain healthy cash flow, allowing you to cover ongoing expenses like payroll, rent, and inventory without straining your finances.
Higher Loan Amounts
With long-term loans, you can borrow large sums of money, often ranging from $25,000 to several million dollars. This can provide the capital needed for significant investments such as expanding your business, purchasing equipment, or acquiring another company.
Better Interest Rates
Longer repayment periods often come with lower interest rates than short-term business loans, especially if you provide collateral. This makes long-term small business loans more affordable over time and can save your business money in interest payments.
Flexible Usage
Long-term business loans can be used for a variety of purposes, from funding business growth to purchasing equipment or refinancing existing debt. This flexibility allows you to address multiple financial needs with one loan.
Cons:
Longer Commitment
A long-term loan requires a longer commitment, sometimes up to 25 years. This means your business will be obligated to make payments for many years, even if your financial situation changes. If business conditions decline, it may become challenging to keep up with the payments.
Collateral Requirement
Many long-term loans require collateral, such as property, equipment, or inventory, to secure the loan. If your business fails to make payments, the lender can seize these assets, putting your business at risk of losing valuable resources.
Lengthy Approval Process
Getting approved for a long-term loan can take time. Lenders usually require extensive documentation, including financial statements, credit reports, and proof of collateral. This can slow down the process if you need funds quickly.
Higher Total Interest Costs
While the interest rate may be lower, the total amount of interest you pay over the life of a long-term loan can be substantial. Since the loan is spread over many years, the overall cost of the loan might be higher compared to a short-term business loan.
How to Get a Long-Term Loan Through SMB Compass
Getting a long-term business loan is a straightforward process. Here’s how it works in three easy steps:
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Simple Online Application Process
Fill out our secure online form in just a few minutes to check your eligibility. We’ll collect important details about your business, like annual revenue, to get a clear picture of your financial health.
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Minimal Documents, Fast Approval
You only need to provide a few essential documents, such as bank statements or tax returns, which can be securely uploaded. We streamline the paperwork process to ensure quick approval and avoid unnecessary delays.
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Quick Access to Funds
Once approved, we take care of the final steps and deposit the funds directly into your account. You’ll have immediate access to the capital, allowing you to focus on growing your business.
Tips for Comparing Your Long-Term Loan Options
When comparing long-term small business loans, several key factors must be considered. Each can impact the total cost of your loan, how it fits into your business, and your overall experience with the lender.
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Interest Rates
Interest rates play a significant role in determining how much you’ll pay over the life of the loan. Even a slight difference in rates can add up over time. Be sure to compare fixed versus variable interest rates, as fixed rates remain the same, while variable rates can fluctuate. A lower rate may mean more affordable monthly payments, so finding the best rate for your situation can save your business a lot of money.
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Minimal Documents, Fast Approval
You only need to provide a few essential documents, such as bank statements or tax returns, which can be securely uploaded. We streamline the paperwork process to ensure quick approval and avoid unnecessary delays.
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Quick Access to Funds
Once approved, we take care of the final steps and deposit the funds directly into your account. You’ll have immediate access to the capital, allowing you to focus on growing your business.
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Loan Amounts
Evaluate whether the loan offers enough business funding to meet your needs. Some traditional or online lenders may offer higher loan amounts, which can be useful if you're planning a large expansion or major purchase. On the other hand, you don’t want to borrow more than necessary, as this can increase the amount of interest you’ll pay. Make sure the loan amount aligns with both your short-term and long-term financial goals.
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Repayment Terms
Repayment terms define how long you have to pay back the loan. Longer loan terms lower your monthly payments, making it easier to manage cash flow, but they may result in more interest paid over time. Shorter loan terms help you pay off the loan faster, reducing the overall interest cost but can increase your monthly payments. Consider your business’s current and future financial situation when deciding which term length works best.
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Collateral Requirements
Some lenders may require you to pledge assets like real estate, inventory, or equipment as collateral to secure the loan. If you fail to repay, the lender could seize these assets. Understanding what’s at risk and ensuring you’re comfortable with these loan terms is essential, as this requirement can affect your business’s financial stability if things don’t go as planned.
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Fees
Additional fees can significantly impact the overall cost of the long-term business loan. Watch out for origination fees, application fees, and penalties for early repayment. Some lenders charge extra for paying off the loan before the term ends, which can be frustrating if you plan to pay it off early to save on interest. Be sure to read the fine print to understand all associated costs before committing to a loan.
Alternatives to Long-Term Business Financing
If any of the long-term business loan options mentioned above don’t seem like the best fit for your business, you can consider several other financing options. Each alternative offers different benefits, depending on your business's needs and situation.
Invoice financing allows you to borrow money based on your outstanding invoices. A lender advances you a percentage of the invoice value, and once your customers pay, you settle the balance with the lender. This option is especially useful if your business faces delays in receiving customer payments, helping you maintain a steady cash flow. The downside is that fees can add up quickly and are only viable if you have reliable accounts receivable.
The Bottom Line
To wrap up, long-term business loans offer a great way to finance growth, large purchases, or significant projects for your business. Choosing the right loan type and repayment terms is key to ensuring your business thrives while managing financial commitments.
At SMB Compass, we’re ready to assist you in finding the best financing options for your specific needs. If you have any questions or need guidance, don’t hesitate to reach out to us at info@smbcompass.com or give us a call at 888-853-8922. We’re here to help you take the next step toward growing your business!
Common Questions. Straight Answers.
The longest term you can secure on a small business loan depends on the type of loan and the lender you choose. Generally, most long-term business loans offer repayment periods of up to 25 years, especially for significant investments like commercial real estate or major equipment purchases. However, some specialized loans, like a commercial real estate loan, might offer terms that extend beyond this, particularly for large-scale projects or government-backed financing.
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