How Do Long-Term Business Loans Work?

If you are thinking about applying for a business loan, you might wonder how long are the business loans typically for? When your business needs funding, it is crucial to evaluate all the small business loan terms since they all vary according to your business’s capacity and needs. There are several types of loans out there but a popular one most businesses consider are long-term business loans.

Long-term business loans are popular among business owners since they have a longer time to repay their debt and have decent terms than other types of business loans. The fact they have small monthly payments is what makes it attractive to business owners. For example, if you need to borrow $40,000 you can pay it back over 12 monthly payments stretched across 10 years. The only drawback about this is that there is an interest rate involved that will require you to pay back more than the amount you borrowed.

What is the repayment period for long-term business loans?

Most long-term small business loans are one to five years and up to 25 years on SBA loans. Your repayment period is determined according to the lender’s terms and guidelines, the institution that funds you, the loan program, the intended use of funds, and your business’s overall financial profile. The repayment structure is typically monthly or bimonthly and your payments start in a few weeks after taking the loan.

The length of your repayment period is determined after the lender assesses your risk as a borrower. The lender needs to be able to trust that you are going to be able to repay your debt on time. From the perspective from the lender, the longer the repayment period, the greater the risk for the lender. Less risk means a less expensive loan.

The following is what will be evaluated during the underwriting process to help determine the repayment period of your long-term loan.

  • Credit score (650 or higher)
  • Outstanding debt
  • Revenue ($100,000 or more)
  • No less than 1 year of being in business
  • Collateral
  • Tax returns

What is needed to qualify for a long-term business loan?

As previously mentioned, lenders want to be able to know that they can trust that you are going to be able to pay back your long-term loan on time. They will ask the following documents to determine if you qualify: bank savings and checking account statements, the last three years of federal income tax returns and recent work paycheck stubs. Also, they will ask you to turn in a detailed business plan to make sure that your plan of using the funds is within reason.

Types of long-term business loans

Business bank loans

Most business bank loans are long-term loans. Banks and credit unions offer some of the best long-term loans where you can get large amounts of funds for low rates. The repayment period for a business bank loan is about five to seven years of monthly payments for a working capital loan.

Term loans

For businesses that cannot go through the traditional route of applying for bank loans, a term loan is a great alternative option. Alternative lenders can offer more flexibility with their qualifications compared to business bank loans and you can receive the funds rather quickly. However, the interest rates for term loans tend to be higher than bank loans. The repayment period for a term loan through an alternative lender is one to five years and will be repaid in fixed monthly or bimonthly payments.

SBA loans

SBA loans offer repayment periods of up to 25 years and interest rates start at around 5%. These loans are not issued by government but by banks that participate in the SBA loan program.

The most popular kinds of SBA loans are:

SBA 7(a) - for working capital and equipment come with a five to ten-year repayment period and real estate loans have terms of up to 25 years.

SBA 504 – this loan has fixed interest rates and a 10, 20, or 25-year repayment term

Microloans – you can borrow up to $50,000 or less and pay it back in six years or less which is the shortest of all the SBA loan programs.

Business Lines of Credit

When you open a business line of credit, you will have the funds to access whenever you need it. It is very similar to a credit card but with lower interest. You only need to pay back and interest against what you use unlike a term loan.

As you can see, long-term business loans have a wide range of repayment periods from one up to 25 years. After learning about the various long-term business loans out there, you can determine which might be a good fit for your and your business.