What’s a business loan?
Today, that question could have many correct answers. With traditional banking institutions getting more innovative and alternative lenders entering the small business lending space, there are many different types of business loans.
But if you were to answer that question 10 or 15 years ago, you’d probably respond in one—maybe two—different ways. Odds are, you’d describe a term loan (a long-term business loan, specifically) because that was pretty much the only type of business financing available to entrepreneurs.
Despite the many flavors of financing available nowadays, long-term loans are still the most common type of business loan—or any loan, for that matter.
And for an entrepreneur, long-term loans—whether from a bank, the government, or an online lender—are probably the best kind of capital you can receive to finance a company.
Where can you find a long-term loan for your business? We’re here to walk you through the ins-and-outs of long-term loans—and tell you exactly where to find the best long-term business loans on the market.
What’s the Difference Between a Long-Term Business Loan and Short-Term Business Loan?
When you hear the words “long-term loans,” you’re probably thinking:
“What makes a business loan ‘long-term’? Long-term compared to what?”
Great question. It’s not an industry standard to give term loans a kind of modifier like this.
And regardless of what’s in front of the word—“long-term,” “medium-term,” or “short-term”—a term loan can generally be described as a lump sum loan in which a lender offers a borrower a sum of capital that they have to pay back (with interest) over a set period of time.
That repayment period you and your lender agree upon is what distinguishes the different kinds of term loans.
And from here, it’s pretty obvious where the main differences between long-term loans and short-term loans lie.
A long-term loan has a repayment period of a few years—anywhere from 1 to 10 years. A short-term loan, on the other hand, has a repayment period of 3 to 18 months. (And you might hear of a medium-term loan, which falls somewhere in between: terms range from 1 to 5 years.)
And while all these loans are “term loans,” distinguishing them by their term length is an easy way to get a sense of what kind of financing you’re working with.
The term set on long-term loans is the fundamental difference between them and their shorter-term counterparts.
However, there are other differences between the two types of term loans (that make long-term loans a small business owner’s best financing option).
Why Long-Term Loans Are the Best for Small Businesses
When you’re on the hunt for small business loans, there’s a wide variety of options laid out on the table in front of you: long-term loans, short-term loans, invoice financing, business lines of credit, equipment loans, etc.
Mostly because these loans offer a hefty sum of capital, are paid over a long term, and come with a very affordable price tag.
Here’s what you need to know.
How Are Long-Term Loans Repaid?
Whereas a shorter-term loans come with daily, weekly, or biweekly payments, long-term loans don’t put that kind of repayment pressure on business owners.
With a long-term loan, you’ll likely have fixed monthly payments over a long period of time.
The repayment period set on your long-term loan depends on the lender you’re working with. We’ll get into the specifics of each of the best lenders for long-term loans in a minute, but you can essentially bet on the following:
SBA loans (a specific type of long-term loan—issued by a bank but guaranteed by the government) have the longest terms of the long-term loan bunch. Terms on a long-term loan from the SBA could go up to 10 years for their most common loan program, the 7(a) loan program, and up to 20 years for their CDC/504 loan program.
Other long-term loans have repayment periods ranging from 1 to 5 years.
And over the term of your loan, you’ll be repaying the loan in fixed monthly payments—meaning you’ll know exactly how much you have to set towards loan repayment each month.
With a shorter-term loan, you have to repay the entire loan amount (plus interest) over a shorter period of time. This means that any given short-term loan repayment might be a large sum of money—which can really cut into a business’s cash flow. The repayment of long-term loans, on the other hand, is stretched out over many, many more months. This means that each repayment is likely a smaller amount of cash—which can be less painful on your business’s pockets.
How Expensive Are Long-Term Loans?
Another reason why long-term loans for businesses are the top financing options available to entrepreneurs is their cost.
Whereas a short-term loan can come with sky-high interest rates (starting at 14%, but soaring as steep as the triple-digits), a long-term loan usually comes with a much more affordable interest rate.
What kinds of rates are we talking here?
Well, at their best, long-term loans can come with interest rates as low as 5% to 6%. At their worst, long-term loans could have interest rates of up to around 20%.
Like any type of financing, the affordability of long-term loans depends on the type of lender you’re working with and your qualification as a borrower (more on that later).
Why Are Long-Term Loans Less Expensive Than Other Types of Financing?
There are a few reasons why you’ll get a better price tag on a long-term loan over a short-term loan or other short-term financing products.
First off, lenders usually only extend long-term loans to more qualified borrowers. We’ll get to exactly what kinds of qualifications you need to be approved for long-term loans in a minute. But as it relates to the cost of a long-term loan, the type of long-term borrower has a big effect. Because long-term lenders generally only work with the most qualified borrowers, they can charge lower interest rates on the long-term loans. This is because their qualification assures the lender that they’ll get their money back.
Another reason why long-term loans are generally less expensive than other business loans is the issue of collateral. Most long-term loans are secured by a borrower’s collateral—a valuable asset like a home, commercial real estate, car, or savings account. By offering collateral on a long-term loan, the lender has less risk extending credit to you. In the worst case that you default on the loan, the lender can seize your collateral to recoup their losses. And as with all business financing scenarios, less risk for the lender means lower interest rates for business owners.
Who Offers Long-Term Loans?
Another main difference between long-term loans and short-term loans is who the lenders are behind these loans.
Who are these lenders we keep talking about?
Generally, two types of lenders offer long-term loans.
Let’s start with the most traditional kind of long-term lenders: the banks.
Traditional banking institutions (both commercial and community) have been the main players in long-term loans.
These lenders are the hardest long-term lenders to qualify for. But if you can manage to score one of their long-term loans, you can probably get the lowest-rate possible on your financing.
Not all business owners qualify for long-term loans from a bank, but they do have options in online, non-bank lenders. These lenders (we’ll get into the list of them in a minute) offer long-term loans to borrowers who wouldn’t necessarily qualify for the same loan product from a bank.
This isn’t to say that long-term loans from online lenders are easy to qualify for, but the approval rate tends to be a little higher. But in exchange for an easier chance at approval, you’ll likely pay a little bit more in interest with an online long-term lender.
What Do You Use Long-Term Loans For?
Just because long-term loans are some of the best financing products on the market doesn’t mean they’re the right kind of loan for any type of business financing purpose.
Why, generally, would you filter your loan search for long-term loans?
Because long-term loans are paid over the long term and offer large amounts of capital (think up to $5 million—if you’re applying for an SBA loan or long-term loan from a bank), they’re usually the right fit for any major investments in store for your small business.
While there’s (usually) not a set use for long-term loans, you could use a long-term business loan to finance the following:
- A major expansion of your business
- Opening up a new location
- Renovating an existing location
- An expansion of your product offering
- A major fixed-assets purchase
Whatever major business goal your long-term loan goes toward, you want to be sure that it leads to business growth that will help you pay off your loan.
How to Qualify for Long-Term Loans
When you run through the differences between long-term loans and their shorter counterparts, it becomes clear why long-term loans are some of the best financing products available to small business owners.
But as to be expected, the most desirable loan products aren’t the easiest to qualify for. In fact, they’re the hardest to qualify for!
Does your business have what it takes to score a long-term loan?
Here’s what you need to show on your business loan application:
- Bank statements. Bank statements are some of the most common documents required on business loan applications. They give insight into how well you manage the cash coming in your business. Bank statements show that you can not only make money, but you can keep it in your bank account. Your bank statements give proof that you have enough cash on hand to pay off your loan.
- Balance sheet. Your balance sheet is on your list of business loan requirements as it shows the basic functionality of your business. It’ll also show that your financials are in good standing—giving a snapshot into what you have and what you owe.
- Profit and loss statements. In general, a P&L shows your business’s net income—proving where your money comes from and where it goes. A P&L is useful for long-term lenders because it shows that your business has steady cash flow.
- Personal and business tax returns. In many cases, lenders want to see both your personal and business tax returns. Both documents should give lenders confidence that you’re responsible with your business’s financials.
- Credit rating. Personal (and business) credit scores are extremely important when you apply for long-term loans. Both credit ratings show how reliable you (and your business) are with your financials. If you show that you’re creditworthy—always paying your bills on time, never taking on too much debt, experience with managing multiple credit accounts, and always keeping your credit utilization ratio low—lenders will be confident that they’ll get their money back when they lend to you.
- Time in business. Another important factor on your application for long-term loans is how long you’ve been in business. Small businesses are risky—and almost half of small businesses don’t make it a full five years. So in general, the newer your business is, the riskier it is to lend to you. Most long-term lenders want to see that you’ve been in business for about two years before they lend to you.
While those are some important business loan requirements you absolutely need to be aware of when applying for long-term loans, the list of requirements could go on.
You should be prepared to also provide the following:
- Business plan
- Business debt schedule
- Use of loan
- Cash flow forecast
- Collateral documentation
- Industry type
- Business licenses, permits, and approvals
- And more
As you can tell, applying for long-term loans is no easy task. If you’re working with a bank lender, you’ll spend hours compiling your loan application. Because alternative, online lenders use more technology in the whole processing and underwriting process, their applications for long-term loans might be a little less extensive. However, it’s no “one and done” kind of process.
And the reason why longer-term loans come with longer application processes is because lenders are really checking out your business to see if you’ll be a reliable borrower. Every document used is a piece of the larger puzzle of your entire eligibility. And because long-term lenders only work with the most reliable borrowers, they require a lot of information to check your qualification.
The Best Lenders Offering Long-Term Loans
Now that you have the full picture of what long-term loans are and why you’d would want one, let’s run through the list of where to find the best long-term loans.
Here are the top lenders offering long-term loans.
The most traditional source for long-term loans has been and still is a traditional banking institution.
Whether that’s your preferred commercial bank or a smaller one in your community, banks are one of the best options out there for long-term loans—that is, if you can qualify with one.
Banks have the most stringent requirements for approving long-term loans, so not many small business owners will be able to score one. If you think you have what it takes to qualify for a long-term loan from a bank, check out some banks that are lending the most to small business owners.
Another fantastic option for long-term loans are those guaranteed by the SBA—known as SBA loans.
SBA loans are issued by banks, but guaranteed by the SBA. The SBA guarantee makes banks a little more comfortable lending to smaller businesses, knowing that they’ll get at least most their money back in the case of a default.
If the SBA loan-route seems like the right path for you, then get familiar with the many different SBA lenders out there.
Out of a list of the 100 most active SBA lenders, Wells Fargo, Live Oak, and Huntington National Bank lend the most in SBA loans.
Bond Street (along with the remaining lenders on this list) is a top online lender for longer-term loans.
This lender has a term loan product that’s structured similarly to a traditional bank loan product. Loan amounts range from $50,000 to $1 million, but on average, Bond Street’s loans are about $175,000. Terms on these loans last from one to three years—with a three-year term being the most common. When you take on a Bond Street loan, you’re on the hook for bimonthly repayment—a schedule common to a lot of different longer-term loans.
When compared to a bank, Bond Street does work with slightly less qualified borrowers. That’s not to say that qualifying for a Bond Street loan is easy, but you need to show at least the following to qualify:
- Annual revenue of at least $200,000
- At least 24 months in business
- A personal FICO score of at least 600
- Steps towards profitability
And because Bond Street works with slightly less qualified borrowers than a bank—and approves an application much faster than a bank—you’ll get a slightly higher range of interest rates. Bond Street can go as low as 6%, but as high as 23%.
Read more Bond Street reviews.
Lending Club is another online lender offering long-term loans.
And while they lend a little less in loan amounts than Bond Street (starting at $5,000 and going up to $300,000), Lending Club can lend to you over a longer term: ranging from 1 to 5 years.
In terms of their minimum requirements for qualification, Lending Club is pretty similar to Bond Street. You need to show:
- Annual revenue of at least $75,000
- At least two years in business
- A personal FICO score of at least 620
- No greater than negative 1% EBIDTA on your last-filed tax return
And when it comes to interest rates with Lending Club, it’s a similar case: They can approve longer-term loans in 1 to 30 days after submission, but they’ll charge more than a bank would. Interest rates on a Lending Club long-term loan can range from 5.90% to 25.90%.
Read more Lending Club reviews.
Next on the list of long-term, online lenders is Funding Circle.
Funding Circle offers a term loan that’s structured similarly to the kind of financing you’d find at a bank.
Loan amounts range from $25,000 to $500,000, with terms of 1 to 5 years. Interest rates on a Funding Circle loan range from 5.49% to 27.79%.
They can approve your loan application in 5 to 15 days, provided you have a full application showing the following:
- A personal FICO score of 620
- 24 months in business
Funding Circle doesn’t require that your business is profitable, but you have a better chance at approval if it is.
Read more Funding Circle reviews.
Does Your Business Qualify for Long-Term Loans?
All said and done, long-term loans are the top financing option for small business owners in need of capital.
Whether you score one from a bank or from one of the top online lenders listed above, you can be confident that you’re growing your business with the best kind of loan on the market.
The post Where to Find the Best Long-Term Loans for Business appeared first on Fundera Ledger.
from Fundera Ledger https://www.fundera.com/blog/long-term-loans