Opting for a Business Loan to tackle unforeseen commercial expenses is a better option rather than exhausting personal savings. These credit offers can be availed both in short and long tenures. Based on the type of loan, the EMIs will vary, and it may even fluctuate in case you have opted for a floating interest rate. In this blog, you will know the various advantages of long term loans.
Long Term Business Loan – Meaning, Definition & Interest Rate
Long-term Business Loan 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.
Here is a list of the benefits and drawbacks of long-term Business Loans.
Pros of Long-term Business Loan
These are some benefits from an enterprise’s perspective when they have opted for a long-term Business Loan:
1. Improves Creditworthiness
A long-term Business Loan ranging from tenures of 120 months to 360 months provides ample opportunity to boost the business’s creditworthiness. Provided all the EMIs are met on time, an excellent credit history is built slowly, which helps secure additional funds as and when needed. Therefore, the business doesn’t face any growth challenges due to a lack of working capital.
2. Ideal for Flourishing Your Business
A long-term Business Loan allows the business owner to avail further funding with favourably long repayment tenures. Also, no such restrictions are placed on the end use of the loan amount. You can use the funds to buy new machinery, start a new line of business, invest in commercial equipment, and so on.
3. Helps You Save Money in the Long Run
One of the major advantages of long-term loans is that you get affordable EMIs. Thus, you do not have to rely on other credit lines. Otherwise, you had to depend on overdraft (OD) facilities for which the stakeholder(s) must pledge fixed deposit(s) as collateral. Although an OD is easy to obtain, it comes with a shorter tenure and a relatively higher interest rate.
4. Helps Avoid Debt Traps
Unlike short-term credit offers, long-term loans help a business prosper. Often business owners overlook this aspect and rely on credit card deals. However, they must understand that credit card loans can even attract interest rates as high as 40%. Thus, a long-term Business Loan can be your way of taking your venture to the next level.
Disadvantages of Long-Term Business Loan
Below are the disadvantages of Long-Term Business Loans:
1. Requires Long Credit History
A Business Loan requires adequate creditworthiness that comes from a certain number of transactions being recorded on the credit report. For businesses just starting off, meeting this status is not practically possible. Hence, they rely on other lines of credit to meet their immediate financial requirements.
2. Elaborate Paperwork and Long Processing Time
Most lenders have a tedious application and approval process to be eligible for such loans. If you are looking for immediate financial assistance, this may not be the best option for you.
Banks and NBFCs sanction long-term loans only after carefully evaluating the borrower’s financial stability. Thus, the typical loan processing time may take 3-4 days.
However, Poonawalla Fincorp offers easy and quick Business Loans with online application and processing. So, choose your lender wisely.
3. Collateral Risk
When lenders give long-term loans at comparatively lower interest rates and with the added advantage of longer tenure for repayment, some of them expect security in return. Collateral, in this case, maybe machinery, real estate, inventory, accounts receivable, machinery, or any other intangible assets.
Also Read: Everything you should know about business loans in India
How to Decide if a Long-Term Loan is Right for Your Business?
These are a few pointers that indicate a long-term Business Loan is probably the best solution for your business:
- You have been able to generate substantial income over a few years and have already established a widespread reputation within the sector.
- The business’ credit history is sufficiently long with an excellent credit score.
- Other credit options are available at much higher interest rates.
Terms and Conditions of a Typical Long-Term Loan
Typically, a long-term loan involves:
- Collateral
As the principal is higher, lenders ask for a security to reduce the risks of a default.
- Tax Benefit
Selected long-term loans feature tax exemption policies. To ensure your loan offer falls under this category or not, you must consult with the lender before opting for the loan product.
- Attractive Interest
As a longer tenure and security are involved, you get a highly competitive interest for a long-term loan.
Repayment Structures for Long-Term Loans
Primarily, there are two repayment methods for long-term loans, such as:
- EMI
In this method, you have to repay the lender as per scheduled monthly payments. The instalments include both the principal as well as interest amounts.
- Bullet Payments
You have to furnish only the applicable interest each month throughout the loan tenure. Only after the loan term is over, you will have to repay the principal through a single transaction.
Also Read: What is Term Loan Interest Rate & How is it calculated?
How to Prepare Business Before Taking Out a Long-Term Business Loan?
Here are a few ways to make your business eligible for long-term loans.
1. Maintain a Stable Cash Flow and Monitor Your Credit Score
Lenders examine these points to determine the liquidity, strengths, and weaknesses of a business. It helps them predict the returns relative to the market conditions.
2. Focus on Profitability
For this, you must track your business regularly. It ensures that all the ventures remain profitable in the longer run. Generally, lenders do not favour businesses as their long-term customers that fail to earn yearly profit.
3. Set Operational Targets and Borrow Accordingly
Lenders will ask you to submit the purpose of obtaining emergency funds, whether it is for financing machinery, clearing existing debts, or simply procuring working capital.
Also, ensure to have a decent record of your insurance papers. Banks or NBFCs examine these documents to see whether your business is adequately insured in cases of unforeseen events.
When to Take a Long-Term Business Loan?
A Business Loan has become accessible and entirely customisable. So, you rely on them readily to expand your businesses. These are some common scenarios during which you can perceive the maximum advantages of long-term loans:
1. While Protecting the Cash Flow
At times, your business would need urgent funds to meet or upgrade operational standards. During those times you can opt for a Business Loan with adequate tenure to avoid unnecessary pressure on short-term cash flow.
2. Leveraging Additional Services Offered by the Lender
Certain lenders specialise in a specific field. Thus, their long-term involvement with your business will prove to be a great match as financial partners. Furthermore, they will be able to assist you with timely risk management by analysing potential threats in that sector.
3. Exploring Other Lines of Credit
When you access the other loan options apart from a Business Loan, you’ll see how structured the latter option is. In this way, you can finally select the best borrowing plan as per your needs.
How to Apply for a Business Loan Online?
Now, you can opt for a truly beneficial Business Loan within a few minutes. Here’s how:
- Step 1: Click on ‘Apply Now’ to open the application form.
- Step 2: Enter important details and upload crucial documents.
- Step 3: Lastly, hit the ‘Submit’ button.
To Conclude
There are many advantages of long-term loans that become evident over the years of repayment. With a more manageable EMI, the operations run smoothly, and no other aspect of a business is hampered.
FAQs
- 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 lakh. 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 Loan starts from 15% p.a. onwards.
- 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.