The first thing to mention when it comes to long term loans is that it primarily boils down to the needs of the business. Frankly, if your business is looking for funds ASAP, then you need to be looking at medium and short-term loans. A little more on that later, but first, let’s look at the pros and cons of long term business loans.
At Strive Financial we define a long-term business loan as a lump sum of cash provided to the business which is paid off over a period of 12 months to 3 years. Repayments are made according to the maximum term schedule and are structured as interest-only with a clear exit strategy in place. This enables businesses to keep repayments low and allows them to pay the loan off in one hit when the time is right. For our long-term loans, valuation fees are paid upfront and other loan preparation fees are capitalised as part of the loan. There are no ongoing fees as part of servicing the loan and they are typically not offered as lines of credit.
Length of Payment Terms: Obviously the clue is in the name. A longer payment term enables a business to structure a stable line of payments to accommodate their regular running costs and even growth aspirations. Take for example a factory investing in manufacturing equipment. A long-term business loan would enable them to acquire the equipment which will in turn be put to use, and the extra production may offset the payments on the loan. A scenario like this could enable them to continue expanding other areas of the business, safe in the knowledge the loan is being serviced at a manageable rate.
Benefit: more time to forward plan budgets and allocate cash flow elsewhere as needed.
More affordable: the single biggest trade-off when it comes to business loans is speed versus interest rate. If a business requires funding sooner rather than later, a premium interest rate reflects the effort needed to fund ASAP and the risk associated with a secured loan. This is where long-term loans are different. If time is not urgent, and a business can afford to spend more time on documentation, and registered valuations of security, a lower interest rate is the positive trade-off.
Here’s a hypothetical calculation:
Short term loan: 250,000 @1% per week = $10,000 interest only repayment per month
Long Term loan: 250,000 @ 12.99% per year = $2706 interest only repayment per month
Clearly, the difference is in the repayments. The shorter-term loan enables a business to fund and close the loan quickly to move onto the next big thing. While the longer-term option enables smaller, more manageable interest repayments to better manage cash flow.
Benefit: smaller monthly repayments versus short and medium-term loans.
Flexibility: With the stability of longer-term repayments, comes reduced flexibility. Where short term loans can be paid off as quickly as possible, with no minimum terms – long-term business loans do have a minimum term. What this means is if a business were to pay off a loan before the minimum term was completed, they would need to pay the required interest up to and including the minimum term. So this reduces the benefit of paying the long-term loan off early and results in less flexibility if, for example, the business was doing well and wanted to get ahead of repayments.
Trade-off: minimum terms mean less flexibility to pay loans off early.
Registered Valuations: With our short-term loans, as we are lending our own money, we do our own desktop valuations of security. This enables us to make fast decisions but at a premium interest rate. Now, for long term loans, registered valuations are required because typically the amounts are much higher, the rate lower and the risk to the lender is different. So any long term loan will need a registered valuation, which comes with it it’s own fees and of course, extra time needed. So you’ll need to account for valuation fees in your loan costs.
Trade-off: unlike short-term loans, registered valuations for long-term loans have fees attached.
Turnaround Time: because long-term loans require registered valuations on first mortgages, they invariably need more time to complete the required documentation before funding. So, as the name suggests, long-term loans aren’t for businesses needing funds yesterday. That’s where there is a clear benefit for short term loans when time is of the essence. If funding needs are not urgent, long term loans are the go.
Trade-off: between valuations, documentation, and lawyers, the average turnaround time for a long term loan is 14 days. This needs to be taken into account when looking for funding.
There is of course no one size fits all when it comes to business loans. And when weighing up the pros and cons of a long-term loan is right for your client or business, it’s about making sure you’re fully informed on the differences between loan types. We’ve been helping Australian businesses fund new opportunities and get out of tight spots for a long time, so if you need help assessing the right loan option, all you need to do is pick up the phone. We’re here to help.
On average 50% of new businesses fail within the first five years. In their time of need, many small businesses will turn to brokers like you for guidance – and your help could get them out of a tight spot. In fact super fast, short-term business finance did just that for one of our clients.