Balancing Risk and Reward: Long-Term Business Loans Explained

When you’re running a business, successful financial decision-making comes down to a careful balance of risk and reward. 

For example, long-term business loans are an excellent option.

But how do you know if a long-term business loan is right for you? 

Understanding Long-Term Business Loans and Their Benefits

Long-term business loans typically extend repayment over a period of years instead of months, which makes this type of loan a popular choice for large capital expenditures.

Due to the extended repayment period, long-term loans provide the benefit of lower monthly payments, the ability to borrow larger amounts of money, and predictable payment schedules that provide consistency for financial planning. In some cases, long-term loans may offer a fixed rate which also reduces uncertainty in a volatile interest rate environment.

When to Consider a Long-Term Loan for Your Business

As mentioned above, long-term business loans are often used to finance more substantial capital purchases that would be difficult to pay off in a short amount of time, such as:

• Major purchases such as equipment, rolling stock, vehicle fleets, or real estate.
• Business expansion, such as opening a new location or acquiring another business.
• Partner Buyouts, such as purchasing an existing partner's share to gain full control or to restructure ownership.

Long-term loans are advantageous in these instances because they allow you to spread out the investment cost over time. Ideally, the loan duration will match the lifespan of the asset being financed.

Comparing Short-Term and Long-Term Business Loan Options

The differences between short-term business loans and long-term business loans are fairly straightforward.

Short-term loans typically must be repaid within a year, while the repayment periods for long-term loans extend to two years or more.

Short-term loans also have higher monthly payments, but the overall cost is lower as you pay interest for a shorter amount of time.

Short-Term Loans vs. Long-Term Loans

When deciding which type of loan to apply for, it’s important to assess your business’s cash flow and financial stability, the nature of the expense being financed, and your overall financial strategy and future growth plans.

Tips for Applying for a Long-Term Business Loan

If you decide that a long-term business loan is the best approach for meeting your goals, following a few best practices can help ensure you are getting the best terms on the loan.

Be Prepared

Prior to submitting your application, gather all of the necessary financial documents (including balance sheets, income statements, and tax forms) and check your business credit report for any errors and issues that might impact your score.

Choose the Right Lender

Loan terms can vary significantly between lenders, so be sure to shop around and compare interest rates, repayment periods, and requirements.

Consider working with a community bank, as they offer more personalized service, competitive interest rates, and faster approval times than many larger lending institutions.

Craft a Strong Loan Application

A well-prepared loan application showcases your business’s strengths and potential, increasing the likelihood of loan approval.

Lenders are more inclined to approve your loan if you clearly articulate your business plan, explain how the loan will be used, and provide detailed financial projections that demonstrate your ability to repay the loan.

Avoid These Common Pitfalls

Being aware of these common obstacles and knowing how to avoid them will improve your chances of being approved for a long-term business loan.

Expecting 100 Percent Financing

It’s rare for lenders to offer full financing for business loans, meaning you’ll likely need to cover part of the cost yourself. Be prepared to provide a down payment or have other funds available to supplement the loan.

Underestimating the Time It Takes to Secure a Loan

The loan approval process can take longer than anticipated, especially when extensive documentation or detailed financial analysis is required. Plan ahead and start the application process early to avoid cash flow issues.

Not Expecting Disclosures of All Material Business Records

Lenders often require comprehensive disclosure of your business’s financial health, including tax returns, balance sheets, and income statements. Ensure all records are accurate and up-to-date to avoid delays or complications in the approval process.

Waiting Until the Last Minute

The middle of a cash crisis is not the time to start applying for a loan. Determining your business’s current and future financial needs, proactively applying for funding, and understanding the loan application timeline will help ensure you have time to properly research your options and have funding available when you need it.

Is a Long-Term Loan Right for Your Business?

Before applying for a long-term business loan, it’s important to consider your business’s needs and all of your financing options. Your community bank is the perfect resource for personalized advice and local loan options.

The BNC National Bank team is always here to assist you with specific questions or general information to help your business make the most informed financial decisions.

Schedule a meeting with one of our team members today, and let’s talk about how BNC National Bank can help your business assess risks and rewards to decide whether a long-term loan is right for you.