What is a long-term business loan?
Depending on your loan product, you may be able to choose between fixed and variable interest rates. Long-term business loans are offered by banks, online lenders, credit unions, and other types of lenders.
How long-term business loans work
Long-term business loans provide a lump sum of capital to the borrower. It is usually repaid monthly and is paid in equal fixed amounts over the term. Generally, this type of loan follows an amortization schedule, meaning you pay more toward interest at the beginning of the loan and more toward principal at the end.
Types of long-term business loans
SBA 7(a) and SBA 504 loans
SBA Microloan
bank loan
Traditional lenders offer long-term business loans, often with repayment periods of up to five to seven years. Bank loans used to purchase commercial real estate can be long-term loans, sometimes up to 20 years. Banks tend to offer lower interest rates than online lenders, but the exact interest rate will depend on your qualifications.
In addition to major banks, you can also apply for long-term bank loans at local banks and credit unions.
How to qualify: Typically, to qualify for a competitive long-term business loan, you need to be an established business with high annual revenue and a good personal credit score (perhaps 700 or higher). Banks may also require collateral.
online business loans
84
A few months.
How to qualify: Online lenders tend to have less stringent requirements than banks. You don't have to meet a minimum annual income to qualify, and credit score requirements may not be too high. Some online lenders require a personal guarantee, but you don't need to put physical collateral on your loan.
Long-term business loans and short-term business loans
The table below shows some of the key differences between long-term and short-term business loans.
|
long term business loan |
short term business loan |
|
|---|---|---|
|
length of period |
Typically 3 to 10 years. In some cases, up to 25 years. |
Usually within a year. In some cases, up to 3 years. |
|
repayment schedule |
Usually repaid monthly. |
Repayments are usually weekly or daily. |
|
Borrower requirements |
Typically, you need high annual revenue, a multi-year business history, and good personal credit to qualify. |
Even startups and business owners with poor credit scores may qualify. |
|
Speed of financing |
It depends on the lender. While banks and his SBA loans take longer to fund, online lenders can provide funds in a matter of days. |
Some online lenders can provide funds in as little as 24 hours. |
|
Ideal for these people |
Purchase equipment or real estate, renovate your business, expand to new locations, hire employees, or refinance existing debt. |
Working capital, emergency expenses, payroll, closing cash flow gaps, purchasing inventory, and taking advantage of new opportunities. |
Additionally, short-term business loans typically have higher APRs compared to long-term business loans. However, the interest rate you receive depends on the lender and the qualifications of your business.
Costs of long-term and short-term loans
Long-term business loans typically have smaller monthly payments over a longer period of time. In contrast, short-term business loans typically have larger monthly payments that need to be repaid over a shorter period of time. Also, short-term loans often require repayments on a daily or weekly schedule.
An example of the breakdown of repayment costs is as follows.
Let's say you have a $100,000 term loan with a 10% APR and a 10-year term. You'll pay approximately $1,322 per month on this loan for a total payment of $158,581, including $58,581 in total interest.
If you repay the same loan weekly over two years (more common with short-term loans), you'll pay $1,062 each week. This equates to approximately $4,602 per month on average. The total repayments on this loan will be $110,429, including total interest of $10,429.
Although your total payments will be significantly lower with a short-term loan, your monthly payments will be more than three times as much as a long-term loan.
