Business loans are available with terms of anything from three years up to ten or even 25 years, but there are many variables to consider, and interest charges are just one.
The benefit of a longer-term loan is that you have more time to pay back the debt, and each monthly payment will be lower because the debt is spread over more years.
However, you might find it more difficult to qualify (especially if your business is quite new), and the overall repayment will probably be higher.
What Are the Best Long-Term Business Loans Currently on the Market?
It’s difficult to list the ‘best’ business loans because the right financing solution will depend heavily on how much you want to borrow, for what purpose, and the position of your business.
As a quick overview, some of the popular long-term business loans available, include
- Lending for between five and 25 years.
- Financing up to a maximum of £500,000 – £5 million.
- APRs of anything from 2.6% to 36%.
- Minimum credit score requirements from 620 to 680.
Because the eligibility requirements are so varied, it’s important to consult an experienced business loan broker or adviser to ensure you apply for the right loan product and from the most suitable lender.
How Do Long-Term Business Loans Work?
Usually, you’ll borrow a lump sum amount and pay it back over a fixed amount of time.
The business makes a monthly payment, which is the same value throughout the loan term. Long-term business loans are better suited for buying property or equipment, expanding or renovating a business, investing in new staff, or refinancing existing commercial debts.
What Are the Different Types of Long-Term Business Loans?
As we’ve mentioned, there are countless business loan products and providers, and the costs and parameters change between each.
Different business loans you might consider include
- Government-backed small business loans are normally with the lowest interest rates and longest repayment periods. Qualification rules vary depending on the schemes open when you apply.
- Bank loans are a traditional business borrowing option, although most banks will accept repayment periods from five to seven years (they’re not usually keen on a longer period). Interest rates can be competitive, from about 2.5% to just over 7%, but that depends on your bank and the level of risk.
- Alternative business loans are available from independent lenders, usually with more flexible requirements. Unlike a high street bank, newer businesses can apply and won’t necessarily need a minimum turnover to be considered.
Should I Apply for a Long-Term or Short-Term Business Loan?
A long-term loan is anything repaid over three to ten years – a short-term loan normally runs for one year, or possibly two.
Lenders may refer to business loan products with a three-year repayment period as medium-term loans.
There are pros and cons to either option, which you can see in the below chart.
|Long-term business loan||Short-term business loan|
|Length of term||Three to ten years||One to three years|
|Repayment type||Monthly repayments||Weekly, daily or monthly repayments|
|Lender requirements||Strong annual turnover, a minimum number of years trading, and good personal credit score.||More flexible – often available to smaller start-ups|
|Turnaround time||Variable – from a few days to several weeks.||From 24 hours to a few days|
|Best suited for|
Interest rates on short-term loans are higher than on long-term loans, although the overall repayment amount will normally be less, depending on your business and the lender.
How Do the Costs of Long-Term vs Short-Term Business Loans Compare?
The benefit of a long-term loan is that your monthly payments will be smaller, spread out over a longer time. A short-term loan usually commands higher repayments, with a shorter interval between them.
As an indicative guide based on two theoretical examples:
- A business loan of £100,000 with a 10% APR and a ten-year term might mean a monthly repayment of £1,322 and a total of £158,581 – interest of £58,581.
- Borrowing the same amount, but over two years would mean repaying £1,062 per week, £4,248 a month, and a total of £110,429 – so £10,429 in the total interest cost.
The best way to compare two long-term loans or select the ideal repayment type is to look at your business requirements, realistically calculate how much you can borrow, and forecast your cash flow to ensure affordable repayments.
If in any doubt, please consult a business loan broker or a financial adviser before committing to large business debts.