January 28, 2019 | By Peyton Sawyer
Searching online for the right loan to fund your small business can be very overwhelming. With such a variety of financing offered, it is hard to pick the funding option that best fits your business needs.
You may find that there are long-term loans, short-term loans, merchant loans, low-rate, high-rate, the choices are endless. Even the type of lender you decide to use may differ from one business owner to the next. Some business owners will qualify to receive financing from a traditional lender such as a bank or credit union while others may not. When that happens, the borrower will look to use a non-traditional lender for alternative funding solutions.
Business Funding Options
Some business owners may think that a long-term loan works more in their favor. It will often mean paying more interest due to a longer payment schedule, but it can provide the option of lower payments and ample time to pay the loan in full. But what kind of business funding will work best for your business loan needs and your current financial situation? Keep reading to find out more about the different loans available to you, as well as the pros and cons for each.
Long-Term Business Loan Approval Process
Long-term loans pose an added risk for lenders, whether the lender is in a traditional or non-traditional setting. The fact is, the longer the loan repayment schedule, the longer it takes for the borrower to satisfy the loan, and the longer it will take for the lender to be repaid.
If an applicant has had a cash flow problem or has experienced difficulty paying creditors in the past, then the chances of approval are very small. Without substantial assets, gaining approval for a long-term loan is extremely difficult, especially if you are trying to receive a long-term unsecured loan. For example, if a business owner has commercial real estate to decrease the exposure of risk by the lender, then your chance for loan approval will increase.
Pros and Cons of Using a Long-Term Business Loan
Benefits of a Long-Term Business Loan
- Lower interest rates
- Lower monthly payments
- Longer term repayment schedule
Disadvantages of a Long-Term Business Loan
- More interest paid over a longer term
- Collateral required for approval
- Impeccable credit history required for approval
Commercial Real Estate Purchase
Purchasing commercial real estate as an investment property or for your own business venture is usually done with a long-term loan. Depending on the lender, the borrower may have the option of a loan term from 5 to 30 years.
While it is common for commercial real estate purchases to be made with long-term financing, short-term financing is also available.
Business Acquisitions and Mergers
It is uncommon for a business acquisition or a business merger to seek funding with a short-term loan. These types of business ventures are almost always approached with a long-term business loan in mind.
Expansion and New Location
Most business owners do not have the cash flow needed to expand their current business or start new construction. When that happens, long-term loans are often used. The reason being is, while the business is under construction and not in operation, it will not be bringing in any revenue. Therefore, the longest term business loan will be used to offset a high monthly payment, making sure the expansion is worth it.
Long-Term Working Capital
Almost every business requires financial infusion at some point. Finding the most cost-effective capital is critical to repaying the cost of borrowing money without dipping into your profits. For many business owners looking to maximize their financial situation, securing the longest-term working capital to do so is essential.
Types of Long-Term Loans
Long-term loans from a traditional lender are most often the cheapest form of financing. This type of loan is offered through a bank or credit union, introducing a lower interest rate, and longer repayment schedule than other loans. Because of the lengthy repayment schedule the borrower can expect to pay a smaller monthly balance.
Long-term SBA loans offer financing backed by the Small Business Administration. This type of loan is another form of long-term lending that offers businesses bank rates that normally wouldn’t have been approved for business funding without the SBA-enhancement.
Lines of Credit
Long-term lines of credit are one of the most popular types of financing for businesses. With the pre-approved funding that a line of credit offers, a business owner has the ability use their line of credit without having to seek any additional approval from the lender. Access to long-term lines of credit can be found with traditional lenders, SBA lenders, and asset-based lenders.
Long-term alternative loans are loans provided by non-traditional lenders, or private lenders, as opposed to banks. While the interest rates are higher than a bank loan, and the loan term does not exceed 5 years, they have the potential to offer businesses the funding they need without the strict approval or extensive loan process a bank loan dictates.
Merchant Cash Advances as Long-Term Small Business Loans
A long-term merchant cash advance is technically not considered a loan, but a form of a business cash advance. This type of funding is normally a shorter term loan than the bank can offer, but some private or non-traditional lenders do have options with longer terms.
With a merchant cash advance, the approval is not based on credit, but on the revenue of a business. Applicants with good, bad, or no credit at all can be approved. Small businesses seeking immediate funding or financing can be approved the same day they apply. Most long-term merchant cash advances offer repayment terms between 12 to 24 months. You can choose to make those payments on a weekly or monthly schedule.
As noted, there are several options to consider when looking for the type of business funding your business needs. Securing a long-term business loan could help your small business succeed and sustain its business health for the long-term as well! With the extra time to make payments and lower interest rates, a business owner may have the money they need to put back into their business, and make their small business really grow.