Know the Pros & Cons of a Long-Term Business Loan

When you are a business owner, you need funds continuously flowing into your business to keep it running. A long-term Business Loan is a popular business financing option that helps you secure such finance in abundance. These loans provide the working capital your business requires and might be the right funding option for your company's needs. To get yourself a Business Loan, you must first know about the Business Loan in detail and analyse its pros and cons.

Long Term Business Loan – Meaning, Definition & Interest Rate 

Long-term Business Loans provide business organisations with a lump sum required for the business. They are made available to businesses that can repay the debt over a prolonged period. Businesses can use them for equipment, inventory, acquisition, expansion, debt refinancing, marketing expenses, etc. Once approved, you will receive the finance from the lender, which is bound to be repaid at fixed monthly instalments, including interest. 

Pros and Cons of Long Term Business Loan 

A long-term Business Loan helps a business grow and expand in the right way. Such a loan has low monthly payments due to the availability of longer tenures for repayment. This makes it an optimum choice for businesses as it provides the space for businesses to grow, expand, increase their income, and ultimately repay the loan without any hassle. However, a company must meet the required criteria to apply for such loans. 

Here is a list of the benefits and drawbacks of long-term Business Loans.

Benefits of Long-term Business Loan:

• Improves your business credit

Most companies have the potential to grow and excel in their field, but due to a lack of funds, sometimes they suffer. The inability to obtain funds becomes the most common roadblock for a business. A good credit score is required to get a long-term Business Loan. A good credit score will make you eligible for additional funding options as well. Maintain a good credit score for your business and keep it functional to secure low-cost capital.

• Ideal for flourishing your business

These loans will offer a lump sum of capital inflow in your business which can be used for expansion. You can use the funds for inventory, buying new equipment, marketing activities, hiring new employees, etc. The prime motive of any business is to sustain and grow in the market, and such funds offer the proper support to get you on this path.

• Helps you save money in the long run

Businesses mostly rely on credit cards or private funds that usually have very high-interest rates. Though these may be comparatively quicker options for cash inflow, they are very costly and unsustainable in the longer run. Sky-high interest rates negatively affect the finances of any business organisation.

• Riddance of expensive debt options

Companies in immediate need of funds must be more aware of the Business Loan benefits they can avail themselves of rather than jumping into risky funding options. Consider loans, such as those offered by Poonawalla Fincorp, that come with lower interest rates, longer tenures for efficient repayment, and fixed low monthly payments. One can choose to consolidate their existing debts with these loans to save money in the long run.

Also Read :- 6 Possible Ways To Lower Your Business Loan Interest Rate

Disadvantages of Long Term Business Loan: 

• Existing business credits

In most cases, small businesses that have recently started operations may not be eligible to apply for such loans because their business credit scores may not meet the requirement. For most lenders, companies must have at least two years of substantial growth and vintage in the market, while others may expect longer years of existence.

• Documentation and Paperwork

Most lenders have a tedious application and approval process to be eligible for such loans. If you are looking for immediate financial assistance, this is not the best option you would want to choose. Documentation to prove the overall financial stability of your business is rigorous and very long. The approval process also takes a considerably more extended period to validate documents. Qualifying for these loans also becomes hard as they require substantial evidence for business credit scores and stability of repayment of loans. However, Poonawalla Fincorp offers easy and quick Business Loans with online application and processing. So, choose your lender wisely.

• Collateral risk

When lenders provide long-term loans at very low-interest rates and with the added advantage of longer tenure for repayment, some of them expect collateral to be pledged as security. Collateral, in this case, may be machinery, real estate, inventory, accounts receivable, machinery, or any other intangible assets.

How to Prepare Business Before Taking Out a Long Term Business Loan? 

Here are a few ways to make your business eligible for such loans.

• Keep good records of your cash flow, operating expenses, and credit scores. Lenders will examine these criteria related to liquidity, strengths, weaknesses of a business, and stability in the market.
• Track your business regularly and ensure that it remains profitable for the most part, barring the formative years. A company that struggles financially may not be able to attain such long-term loans.
• Lenders will examine if you are a majority stakeholder in the business. They may require borrowers to own a certain minimum percentage of the business stake to be eligible for the loan.
•  Have the operational targets set out for the money you are about to borrow. Lenders will require you to submit the purpose of obtaining such funds, whether it is for purchasing equipment, debt refinances, or working capital.
• Have a good record of your insurance papers, as lenders will need to examine if your business is adequately insured in cases of fire, flood, or other losses.

When to Take a Long-Term Business Loan?

Long-term business loans are typically suitable for specific situations:

• Expansion and Growth: When planning to expand your business operations, such as opening new locations, investing in infrastructure, or purchasing equipment, a long-term loan can provide the necessary capital.
• Business Acquisition: If you are considering acquiring another business or merging with a company, a long-term loan can help finance the acquisition costs.
• Large-Scale Projects: Long-term loans are beneficial for financing large-scale projects, such as building construction, product development, or research initiatives, which require substantial capital over an extended period
• Working Capital: In some instances, where there is a need for significant working capital to support day-to-day operations or to bridge seasonal fluctuations, a long-term loan with a flexible repayment structure can be considered.

Evaluate your business's financial goals, cash flow, and repayment capacity to determine if a long-term loan aligns with your objectives and can provide the necessary funding for your business needs.

Conclusion

It is advised to consider the financial situation of your business before applying for long-term Business Loans. It can help you with the financial aid required to grow your business and take advantage of the market.

Frequently Asked Questions:

• What is the maximum loan amount that can be availed under a long-term Business Loan?

Under a long-term Business Loan, a borrower can avail loan of up to 50 lakhs. The tenure for a long-term Business Loan is up to 3 years. Please note that the loan amount and tenure might differ from lender to lender. 

• What is the interest rate offered by financial institutions for long-term business loans?

The interest rate offered by financial institutions such as Poonawalla Fincorp for long-term Business Loans starts from 15 p.a. onwards. 

• Do I need to submit any collateral for long-term loans?

Car Loans, Education Loans, and Home Loans are prime examples of long-term Loans. A long-term loan has a longer tenure with a lower rate of interest. Generally, there is a high risk involved in the long-term loan which demands collateral. There are few financial institutions that offer long-term loans without collateral. 

• Are there any tax benefits if I avail of a long-term business loan?

There is no tax benefit on the repayment of the principal amount. However, your Business Loan interest amount is exempted from tax as per the Income Tax Act, 1961.  Usually, the interest paid on a business loan is deducted from the gross income.