Business expansion is a crucial way to grow your enterprise. But funding expansion and growth strategies requires substantial funds. That’s why most business owners turn to long-term business loans. A long-term business loan is a type of debt financing option that can be repaid over an extended period of time. Such loans come with lower interest rates and manageable EMIs making it easier for businesses to handle and repay their outstanding financial obligations.
Interest Rates and Charges
Long-term business loans have a longer repayment tenure, allowing financial institutions to grant lower interest rates on these loans. Generally, interest rates on long-term loans vary from 9.75% to 30% p.a. depending on the lender selected. A processing fee of around 2%-6% is charged on the loan. Other charges like penal interest charge, foreclosure charge, and prepayment fee are outlined in the loan agreement and vary from lender to lender.
Features
Let’s have a look at the main features of a long-term business loan:
- Attractive interest rates
As mentioned earlier, long-term loans come with competitive interest rates. Rates can vary depending on factors like the lender selected, loan amount, tenure, and your credit score.
- High loan amount
Businesses can borrow sizable funds with a long-term business loan. While the maximum loan amount depends on the lender’s policies and your credit-worthiness as a borrower, it can go as high as Rs. 100 Crores.
- Long repayment tenures
Longer repayment tenures are a characteristic feature of these business loans. Business owners can borrow funds for up to 5 years (more for some lenders) to comfortably repay the loan without feeling the burden of hefty EMIs.
- Fixed and floating interest rates
Long-term business loans may be sanctioned with fixed interest rates or floating rates. Fixed rate loans have a specific rate of interest that’s locked in the day the loan is sanctioned. Floating interest loans offer variable interest rates depending on the prevailing benchmark rates in the market.
- Collateral requirement
Businesses can choose from both secured and unsecured long-term loans. Secured loans generally have a higher principal requirement and therefore, need collateral pledging to secure the lender against the possibility of default. These loans also come with lower interest rates than unsecured ones.
Eligibility Criteria
Here’s a run-down of the common eligibility criteria used to sanction long-term business loans in India:
- The applicant must be an Indian citizen.
- The applicant must be in the age group of 21 to 65 years.
- The applicant must have a CIBIL score of over 700.
- The applicant must have a profit-making business for the last 2 years.
- The applicant must meet the minimum turn-over requirement.
- The applicant must have ITRs filed for the last 3 years.
The above list sums-up the common eligibility criteria used to evaluate long-term business loan applications. However, eligibility parameters can vary from one lender to the next. It is advisable to carefully review the lender’s eligibility policy before applying to minimise chances of rejection. You should also note that lenders prefer companies with zero previous defaults and good credit histories.
Documents Required
MSMEs, established business owners, and entrepreneurs who meet the set eligibility parameters of the lender can apply for long-term loans with the following documents:
- Business plan
- Business PAN Card, along with business ownership proof, trade licence, and sales tax certificate
- Business vantage and address proof
- Partnership agreement (if applicable)
- ITR and profit and loss statements from the last 3 years
- Bank statements from the last 12 months
- Article of association and memorandum of association
- KYC documents of the applicant and co-applicants (Aadhaar Card/Passport/Voter’s ID)
- Passport-size photographs
Advantages of Long-Term Business Loans
Term loans for business offer business owners the following advantages:
- Builds a Good Credit Score
Timely repayment of a long-term business loan boosts the credit-worthiness of the borrower. Meeting EMI obligations diligently and avoiding defaults establishes a strong credit history, making you eligible for better loan terms in the future.
- Avoids Debt Traps
Long-term business loans help avoid the pitfalls of debt traps commonly associated with short-term loans. Business owners often turn to short-term debt instruments like business credit cards to settle immediate short-term cash requirements. Since the interest rate on credit cards is high, defaulting on payments results in accumulating debt. Long-term loans, on the other hand, offer much lower interest rates and longer tenures.
- Helps to Expand Business
Long-term business loans are instrumental in fueling business expansion and growth. With a long-term loan, you can borrow higher amounts for longer durations to fund the growth phase of your business. This may include leasing new office spaces, hiring new staff, buying equipment, and funding marketing campaigns.
- Saves Money
As mentioned earlier, long-term business loans come with a lower interest rate than most other long-term debt financing options. In other words, the cost of borrowing is cheaper than other options. Lower interest rates also ensure more manageable and affordable EMIs.
Disadvantages of Long-Term Business Loans
The following disadvantages are commonly linked to long-term business loans:
- Needs Collateral
Long-term business loans that have lower interest rates and longer repayment tenures generally require collateral deposits. To avail of such secured loans, business owners must deposit collateral assets like property, accounts receivable, etc. Firstly, pledging collateral may be difficult for new businesses with limited assets. Secondly, defaulting on the loan may result in losing ownership of the pledged collateral.
- Long Processing Time
Generally, long-term loans for business are sanctioned only after a thorough scrutiny of the borrower’s submitted documents to evaluate the borrower’s financial stability. This careful assessment and verification of the loan documents and application results in a long processing time. The prolonged approval process can be challenging for a business that requires immediate financial assistance.
- Strict Eligibility Requirements
Lenders can have stricter eligibility requirements for long-term business loans, especially ones that involve a sizable loan amount. For instance, a decent credit score above 700 and good credit history are common eligibility criteria for most long-term business loans. However, building a good credit history requires a minimum number of transactions on the credit report. Similarly, such long-term loans generally have a minimum business vantage requirement. Entrepreneurs who have just started out might find it difficult to meet both these criteria.
When to Take a Long-Term Business Loan
While long-term business loans have both pros and cons, the advantages outweigh the disadvantages in the following instances:
Sizable capital requirement: Long-term business loans are ideal for businesses that require substantial capital for growth and expansion activities like asset acquisition, capacity expansion, launching new products, purchasing a plant or equipment, etc.
Predictable cash flow: Most long-term business loans have an EMI repayment structure where the borrower has to repay a fixed EMI sum until the end of the loan tenure. Therefore, long-term loans are favourable for established businesses that have a stable and predictable cash flow to meet this mandatory financial obligation.
Manageable EMIs: Due to shorter tenures and higher interest rates, short-term loans have higher EMIs. Sizable EMI payments may not be manageable for many businesses as a significant portion of the revenue gets directed towards loan repayment, possibly compromising short-term cash flows. Long-term loans, on the other hand, prove to be better alternatives with lower and more manageable EMIs.
At the end of the day, business owners have to carefully assess their repaying capacity, requirement, and purpose before choosing a long-term loan.
How to Decide if a Long-Term Business Loan is Right for your Business
Unsure if long-term business loans are right for your business? Here’s a quick guide to help clarify things:
- Long-Term Business Loan Lenders Prefer Established Businesses
Since long-term loans generally involve a high loan amount, lenders prefer businesses with a well-established base and substantial revenue records spanning years. In fact, long-term loans have a business vantage eligibility requirement of 3-5 (depending on the lender) that can instantly disqualify newer companies. Established businesses showcase a proven record of performance and stable profitability which speaks to the repayment capability of the enterprise. Therefore, if you meet the minimum business vantage requirement, turnover threshold, and other financial metrics, you can consider applying for a long-term business loan.
- Lenders Need Confidence in Their Investment
Lenders favour businesses with an established positive credit history than ones with a mixed or zero history. They review various documents to evaluate your credibility including cash flow projections, ITRs, and bank statements. A good credit history with timely repayments ensures reliability for the lender. Therefore, if your business has a sufficiently long credit history with a good credit score, you may easily qualify for a long-term loan.
- Long-Term Business Loans are a Major Commitment
Taking a long-term business loan can significantly impact your finances. Therefore, you need to ensure that you can afford the monthly payments and avoid defaulting on the loan. If you think you can manage the business’s liquidity requirements while making monthly payments, you can opt for a long-term loan. Moreover, while interest rates on such loans may be low, their long tenures increase the overall interest component on the loan. As a business owner, you should carefully consider these factors before you commit to a long-term loan.
What to Do if you Don’t Get Approved for a Long-Term Business Loan
Sometimes your business loan applicable may be rejected by the lender. If that happens, here’s a few steps you can take:
- Understand the reason for rejection
Loan applications may be rejected due to various reasons like incomplete documentations or non-fulfillment of eligibility criteria. Reach out to the lender and find out why your loan application was rejected. Understanding the reasons for rejection will help you rectify them before applying again.
- Improve your financials
Carefully review your business’s financials covering aspects like your cash flow, debt-to-income ratio, and credit history. Try improving financials over time. For instance, you can start by paying down debt which will also help boost your credit score.
- Review your business plan
Sometimes long-term business loan applications get rejected due to the way your business plan is drafted. Try assessing your business plan to refine areas and highlight the growth potential, competitive advantage, and general value proposition of the plan.
- Reapply with a different lender
You can choose to reapply with a different lender, but only after you have rectified the issues that resulted in application rejection.
Conclusion
Long-term business loans are judicious funding solutions for businesses requiring substantial capital influx at a low cost. However, these loans work best when businesses have ample cash flow to cover monthly payments and keep operations running. Therefore, MSMEs must carefully consider if a long-term loan for business fits their overall financial strategy and growth planning blueprint.
Frequently Asked Questions
What is the interest rate offered on long-term business loans?
Interest rates on long-term business loans vary depending on the lender’s policies, your credit score, tenure, and the loan amount. Lendingkart offers long-term business loans starting from 1.25% p.a.
What is the maximum tenure for a long-term business loan?
The maximum tenure for a long-term business loan is 5 years. However, it may exceed this limit depending on the lender’s policies.
Do I need collateral for a long-term business loan?
Collateral pledging may be necessary for long-term loans with high principal amount requirements.
When should I opt for a long-term business loan?
Business owners should opt for a long-term loan if they require substantial capital, they have predictable cash flows, and prefer manageable EMIs.
