Long-term borrowing is a common way for businesses to reduce the monthly cost of repaying a debt. You pay less each month because the repayments are spread out over a longer period when compared to a short-term business loan. However, there is also more time for the interest to compound and the debt to grow before you pay it off. In this article we take you through the important details of long-term finance to help you decide how long your company should be borrowing for.
What is a long-term business loan?
A long-term business loan is a financial product where a company borrows money from a lender and then paying it back over a significant period of time, usually multiple years. Spreading the cost of a loan over a long stretch of time will increase the number of repayments, but reduce the cost of each one. The effect of this is that your business does not need to pay as much each month, but you will need to make more payments overall. You will also pay more interest as there is more time for the interest charges to grow the debt before you can pay it off.
With a long-term business loan, you may find that lenders require significant evidence of your company’s financial stability and future revenue streams. This is because the loan provider will need to be confident that you can continue to make repayments years into the future.
How does a long-term business loan work?
A long-term business loan works in a similar way to other business loans. You will need to apply with your chosen lender – either at a branch, over the phone or online – then provide the necessary information and documents to support your application. This can include basic details such as your business address, company status (incorporated, partnership or sole trader) and business name, plus documentation such as bank statements and official accounts.
If you want to know how a standard business loan works, read our article 'How do business loans work?'.
Some loan applications may require minimal effort and can be approved in minutes, while others may require a bit more legwork and patience. Generally, the more money you apply to borrow and the longer the term you want to pay it back over, the longer you will need to wait for a decision. This is because your potential lender will likely want to take the time to carefully assess your application before it commits to lending your business a lot of money and agreeing to let you repay it over a long period of time. However, once the loan is approved you can expect to receive the money relatively quickly, often within a working day.
One potential delay could be if your lender requires a personal guarantee from a director. This is a relatively common requirement for a business loan, especially if the company applying is small or has a limited credit history. The process requires a company director to commit to repaying the debt if the business fails to do so. We cover loans for smaller businesses in our articles 'What are business startup loans?' and 'How do small business loans work?'.
We have more information on a standard business loan, in our article ‘What is a business loan?’.
Do you need a long-term business loan?
Whether your business needs a long-term business loan, or any other type of long-term finance, will depend on its financial situation. A long-term business loan could be a way to fund a relocation, hire new staff or buy new equipment, while still keeping monthly outgoings manageable. Building, growing and maintaining a business can be expensive, especially if there are dramatic changes in external costs or shifts in the market your business operates in. If you find your business is struggling to pay bills or fund essential developments, you could look to a long-term loan for the cash. However, almost all loans will charge your business interest, so borrowing money will cost you money. If borrowing is essential, the advantage of a long-term business loan is that you can keep monthly costs down by spreading out the repayment.
Read ‘Business loan eligibility: Who can get a business loan?’ to learn more about whether business borrowing is right for your company.
How to choose the best long-term business loan
Here are some key points to consider when it comes to picking between different lenders and loans:
| Decide how much you need to borrow | Make sure you know what the lender’s maximum loan amount is before you apply. If it does not offer the money you need, try looking for a different provider or consider a secured business loan. On the other hand, try to ensure you do not borrow too much. Adding a bit extra to your loan will not increase the monthly repayments too dramatically with a long-term business loan, but the overall cost could go up significantly. |
| Know how much the loan costs | It is crucial to understand how much a specific loan is going to cost your business before you apply. This involves knowing what your monthly repayments will be and how many repayments you will need to make. Remember that a longer loan term will mean paying more interest overall, but the monthly cost will be lower. Weigh up whether a lower monthly commitment or a lower overall cost is more important to your business. |
| Think about the loan term | This relates to the loan cost, but also to how you see your business growing in the future. You may not want to sign up to years of monthly repayments, or you may think that the long-term commitment will be easier to meet as your business grows more profitable. |
| Look up the interest rate | This is a crucial part of the overall cost of the loan, but keep in mind you may not know the exact figure you will pay until you have a loan offer. When you compare loans, you will usually see a representative APR, which will give you an idea of the rate you will get, however, it is not a guarantee. Read our article ‘What is representative APR?’ to learn more. |
| Research the fees | Fees are another component of the overall cost of a loan. You may be charged an application fee, an arrangement fee, a product fee, early repayment charges and late payment charges. Make sure you read your lender’s loan terms or get in touch directly to confirm what extras you will need to pay for. |
| Consider the repayment details | Some loans are more flexible than others. If you find that you can repay the money early, some lenders will be happy for you to clear your debt, while others will charge you to do so. In the case that you miss a repayment, some lenders will allow for a ‘payment holiday’, while others will charge a hefty fee. With a long-term business loan, it is important to think about how your business revenue may change and what level of adaptability you may require from a lender. |
Getting a long-term business loan with bad credit
You may find it more difficult to get a long-term business loan if you or your company has a low credit score. A credit score is a rating of how trustworthy a borrower is when it comes to repaying debt. It is calculated by a credit reference agency (CRA) assessing the creditworthiness of your business. The CRA creates a credit report that a lender can use to decide whether to approve a loan or not. As part of the application process, your personal credit history, or that of other individuals associated with the business, may also be looked into.
You can read more about business credit scores in our article ‘What is a business credit score?’.
A credit score can be impacted by repayment history, past debt, current debt, recent applications and trading history. If you or your business has a low credit score, it will be harder to get any loan, especially a long-term loan. A lender that approves a long-term business loan application is likely to be confident you can make repayments on time for a number of years. It may be hard to convince a lender your business can be trusted to do this if it has a bad credit history or even a limited credit history.
Fortunately, getting a business loan with bad credit is not impossible. If you are approved, you may need to pay a higher interest rate to balance out the additional risk the lender believes it is taking on. We have more information in our article ‘How to get a business loan with bad credit’.
Pros and cons of a long-term business loan
There are some significant advantages to long-term business loans over short-term borrowing or other means of financing. However, there are also some important disadvantages to long-term loans. Here are the main points you should consider:
Pros of a long-term business loan
- The interest rate on a long-term loan is often lower than with a short-term loan, though the total interest you pay can be more with a longer loan term.
- Lower monthly repayments give you the flexibility to invest your business revenue elsewhere, or overpay your loan if the lender allows it.
- Paying less each month should mean you are less likely to miss a payment and face expensive late-payment charges.
- A long-term repayment plan can be easier to budget around, meaning you can better plan for the future of your business.
Cons of a long-term business loan
- The amount of interest you pay overall will be more than with a shorter term on the same interest rate.
- Long-term loans can be harder to get, as a lender will need to be convinced your business will remain profitable over a longer period.
- You may need to secure your loan against an asset, which will be at risk of being sold if the debt is not repaid.
- Committing to a long-term repayment plan can be risky, as your business may not be guaranteed to remain profitable over many years.
What happens if you cannot repay a long-term business loan?
Missing a loan instalment, or failing to repay your debt entirely, can be expensive and damaging for your business. Most lenders will charge additional fees and extra interest on missed payments. Defaulting on the debt can lead to any secured assets being sold and can significantly damage the business’s credit score and the personal scores of any individuals involved. As a result, borrowing will likely become much more difficult in the future.
If your business is struggling with an existing repayment schedule, contact the lender. Many lenders will be willing to adjust the repayments, approve a repayment holiday or lengthen the repayment period to make the debt more affordable.
