How Do Long-term Business Loans Work?

Long-term business loans typically come with lower interest rates, but the lengthy terms mean more interest to pay over time.

Jeff Salway Published on 01 October 2021.
How Do Long-term Business Loans Work?

Most businesses go through periods when they need to source some form of extra finance. For large businesses, there is often the option of raising money through investment markets or using some of their existing assets to release capital.

This isn’t an option that small and medium-sized enterprises (SMEs) typically have. However, there are still several routes available to them, with traditional business loans among the most common.

There are a few things to think about when taking out a business loan, including the cost, what you need it for and the type of loan you want. You will also want to consider the duration of your loan, with short, medium and long-term deals available.

What is a long-term business loan?

One of the big differences between business loans and personal loans is that the former are often offered over much longer terms. Business loans can be taken out for up to 10 years or so, although in some cases it can be up to 25 years. But while this means your interest payments are likely to be lower, there will be more interest to pay across the whole of the term.

» MORE: How do business loan interest rates work?

What are the types of long-term business loans?

The first port of call is usually a bank or building society. They typically offer secured loans, where the borrower puts up some form of security (such as a business property) that the lender can claim if the loan can’t be repaid.

There are some alternative sources of long-term finance too. These include asset financing (such as hire purchase and equipment leasing) and peer-to-peer lenders (online services that connect businesses that want to borrow money with those that want to lend it, with lenders receiving returns in the form of the interest paid by borrowers). Both of these are more strongly associated with short-term loans, but longer-term options can be found too.

» MORE: Funding options for growing your business

How can I apply for a long-term business loan?

There are a few boxes to tick when you apply for any business loan.

When you compare loans you’ll see an APR figure, which is the annual percentage rate at which you’ll repay the loan. This includes the interest rate as well as standard charges that will be repayable over the year.

That final part will be evidenced through your credit report, so it’s worth making sure your credit record is clean and up-to-date before you apply. This includes filing your accounts before the deadline, paying your invoices on time and checking that all the details it holds about your business are accurate and up-to-date.

So when it comes to applying for a long-term business loan, it’s important to show that you can afford it and that you have a purpose for the money, as this may influence the lender’s borrowing decision and the rate charged.

» MORE: Can I get a business loan?

What is a business bridge loan?

For some businesses it can be worth exploring bridging loans. These are designed to cover gaps in funding, such as while you wait for a long-term finance arrangement to be completed. They are usually secured, meaning assets (such as property or equipment) are put up as collateral.

However, by definition they are short-term loans and rarely appropriate for long-term financing.

» COMPARE: Business bridging loan rates and deals

How can I compare business loans?

One way to check out the different lenders and loans available is to use comparison websites.

Most comparison services offer business loan tables that tell you the amount each provider can lend, the terms available and the interest rates available. The interest rate gives you an idea of how different providers compare, but does not include charges and fees, but the exact rate you’ll be offered will depend on things such as the length of your loan, how much you’re borrowing and your credit record.

» COMPARE: Business loan rates and deals

Image Source: Getty Images

About the author:

Jeff is a freelance journalist who writes across finance & business. He was the personal finance editor at The Scotsman & Scotland on Sunday & a member of the Financial Services Consumer Panel. Read more

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