• Term Period – The term of the loan is usually more than three years and can run up to 20 years or more. A long term bank loan is often flexible and the repayment period may be renegotiated if necessary. The advantage of paying over a longer term is that the regular payments will usually be less. Loan payments can take place on a monthly, quarterly or annual basis. The longer term, though, will usually mean that your cumulative interest payments will be higher.
• Repayment structure – The loan is often designed so installments are based on the profits or cash flow of the borrower. This is advantageous for businesses since they will be able to make payments based on performance. As the payments tend to be small as compared to shorter term loans, they can use more of their money to reinvest in their operations. Often the loan agreement limits the amount of additional debt and other financial obligations the business may take on. Other loan types include those with fixed interest rates and repayment terms.
• Target market – The long term loan is designed to provide capital to small businesses. Potential clients must have good financial standing and should be able to generate enough business to make the regular payments. Lenders will take into account the future prospects of the company as repayment will take many years. However, the lenders are partially protected since they will have sufficient business assets as collateral in case of a default.
• Uses for loan – These loans are best used for substantial investments in one’s business to include major improvements, construction, purchase of equipment, expansion and purchases of other businesses. The loans can also be used to augment available working capital.
• Requirements – Many banks will only provide long term loans to small businesses that are making major purchases including buying a storefront or costly equipment. Generally, banks will provide loans only up to 65 percent to 80 percent of the asset that the loan will be used to purchase. In such cases, the newly-purchased asset is used as collateral. Banks will take into consideration the credit record of the business before deciding on acceptance.
• Costs – Rates will depend on the exact type of loan involved. The longer the repayment period, the smaller the regular payments, but also the more money that must be paid in total. By making a large down payment, businesses can reduce their monthly, quarterly or annual payments. Rates can vary from lender to lender, so it pays to shop and compare before signing any loan contract.
• Availability – The availability will depend on the economic situation and one’s locality. The requirements for approval of long term loans can be volatile during periods of economic instability.
Small businesses should first consider whether they qualify for long term bank loans. The business will have to be in very good financial shape without much existing debt burden.
Once the loan is granted, the business will have limited options in obtaining further financing in many cases. The loan agreement may prevent the business from taking on further debt or even from increasing salaries or dividends. Whatever assets were used as collateral could be lost in case payments cannot be made according to the loan terms.
A loan that is repaid based on cash flow or profits can be advantageous so long as the percentage taken is not too high. Businesses with small margins may find themselves squeezed with this type of payment program. Additionally, seasonal businesses might have difficulty using this scheme.
A long term bank loan is best suited for a company that is in good financial shape and that needs extra capital to handle expanding business load. The company's margins should be sufficient to handle the repayment schedule, and the possible loss of collateral should not have catastrophic impact.