Is a Long-Term Business Loan option right for you?

Business owners at some point of time must have encountered a financial hurdle which threatened the business sustainability and profitability such as unexpected business expenses. There is also another category of financial obligations for business owners such as business expansion. Entrepreneurs may be required to expand their business in infrastructure and other geographical markets. You may also find it necessary to enhance the quality of your existing facilities by purchasing commercial real estate.

Irrespective of the nature of the expense, entrepreneurs and company directors may find themselves in a financial quandary in meeting the financial requirements in various aspects of conducting business.

Various scenarios under which a long-term business loan can be availed:

• In cases of emergency expenses, the inability to meet the financial obligations may make situations worse for your enterprise.
• Many business owners are finding online business loans a good solution. Hence many smart business owners are finding the proposition of long-term business loans attractive to meet large expenses of the firm.
• If you are inclined to spread the repayment obligations of a large expense over an extended period, then taking a long-term business loan may be the right option for your business.

It is always advisable to do the appropriate research and enhance your knowledge on the various parameters of a business loan online such as interest rates, benefits, and contractual terms and also get acquainted with the drawbacks of long-term business loans. First let’s understand the mechanics of how long-term business loans work:

What is a long-term business loan?

This is a loan variant where the repayment schedule is extended for a longer period. The borrower receives a specified amount of money from the lender for various business expenses which may include real estate investments, infrastructural needs, purchasing a commercial vehicle and recruitment of new employees.

Long term business loans help the companies and business organisations in managing their cash flows by not necessitating the fulfilment of any expenses from your pocket. Instead the lender offers you a long-term business loan, which you get to repay over several years with instalments which also include charges processing fees and interest.

Why are long-term business loans getting popular?

The credit off take has decreased due to the pandemic scenario and the overall business atmosphere for small businesses has decreased due to fall in demand. Recently RBI also has directed banks not to charge penal interest in the case of missed instalments. Due to positive growth factors in the economy, entrepreneurs are gearing up to enhance their business reach into different markets.

Expansion of existing production facilities is being carried out across various geographical regions and markets to improve sustainability and long-term profitability of the enterprise. Online business loans can meet the immediate credit requirements of small time businesses and solve the cash flow problems.

What are the different repayment terms associated with the long-term loan?

The term limits depend on multiple factors such as:

• Lending policies of the financial institution
• Quantum of the online business loan amount
• End use of the loan amount by the borrower

The end use of the funds is an important parameter as it has a direct connection with the quality of repayment in terms of consistent payments. Generally long-term business loans are meant for infrastructure purposes and the lenders go to enormous lengths to make sure that the funds are not being diverted for capital infusion or for individual purposes. RBI guidelines mandate that long term business loan should be strictly used to augment the production capacities of a business.

On a generalized basis most of the online lenders stipulate that the long-term business loan should have a loan repayment tenure between 3 years to 10 years. Exceptions are made during the purchase of commercial real estate where the repayment tenure extends to 20 years. This situation is similar to getting a housing loan from public sector banks in which they provide the repayment tenure to be within the range of 20 to 25 years.

Different categories of interest rates that are applied on a long-term loan

The lending policies of the financial institutions dictate that the interest rate should be floating on a long-term business loan as it makes economic sense. Fluctuations in the markets and changes in the banking environment make it unsustainable for standard interests to be applied over a long tenure payment, for example 10 years.

The financial institutions think it is prudent to connect the individual interest rate on the long-term loan with the macroeconomic factors such as credit availability, financial position of the borrower for an extended period of time and inflation.

Basic factors that determine the interest rate are the following

• Quality of credit worthiness of the borrower
• Quantum of the loan availed
• Economic category on which the long-term loan is taken for example construction, retail, FMCG

Credit rating by international reputed agencies plays a role in determining the interest rates. A borrower with the best credit history is regarded as a low-risk customer by the financial under. Low risk borrowers are welcomed to take a loan by lenders and the interest rates on the loan are decreased up to a maximum of 5%.

Encouragement is given to those genuine borrowers who have a good history of repayment of previous loans in different financial institutions across the country including payments on credit cards. Alternatively, business organisations and entrepreneurs with a shaky credit history belong to the high-risk category and may be assigned an interest rate which is 30% above normal.

Who can be successfully considered for a long-term business loan?

Online business loans have requirements which vary for different sets of borrowers. Also depending upon the size of the balance sheet of the financial institution, the internal lending policies may differ.

The following are the standard requirements that are stipulated by most of the online business loan lenders:

• Applications for long term business loans must elaborate on the end use of the funds. In other words, the legitimacy of the business expenses is closely verified by the online business loan authorities.
• In case of partnership or corporate lending the lenders insist that the prospective power should hold at least 20% of the total stake in the business.
• A minimum requirement of a credit score is mandatory. All borrowers are expected to cross the threshold of 600 in credit rating. Incidence of higher credit scores results in more favourable loan conditions such as interest rates and other loan terms.
• Most of the reputed financial lenders also insist that incorporation of the business should be done at least two years before the application of the long-term business loan
• Revenue generation from the existing operations are also verified after seeing the balance sheet and profit & loss statements of the company.
• Collateral security must be provided by the borrower in case the application loan amount crosses a certain figure. In the absence of a specific collateral security, personal guarantees are also accepted by the online business institutions.
• Blanket liens on the raw materials and valuable inventory can also come under the contractual terms of the loan agreement.

 

In case of bad credit history, what are the qualifying conditionality’s for a long-term business loan?

Public sector banks and other online lenders work in tandem with credit rating agencies like TransFax to aggregate repayment history of the borrower. Online business loans are indeed an attractive financing option to the majority of the entrepreneurs present in India.

The financial transactions of the enterprise are evaluated, and any incidences of foreclosures, defaults and chapter 11 bankruptcy filings are frowned upon. These financial incidents are considered as disqualifying instruments and prohibit borrowers from receiving online business loans.

Bad credit history is not uncommon among the population. Online business loans offer an attractive financing proposition to individuals with credit history problems. Alternate lenders are offering long term loans even when credit scores are less than 500. However, these types of loans come with strings attached. The primary one of them being charging of higher interest rate for borrowers with unfortunate and unavoidable bad credit

Borrowers who have a credit rating score of less than 600 might do well to get free credit reports along with credit score to approach the online lenders and negotiate for the best rates and loan terms.

These online business loans help those businesses which are in the red, to clear current debts and take other production enhancement measures to boost the revenues of the company, thus making them an ideal candidate for future long term business loans

Do start-ups fulfil the eligibility conditions for long term business loans?

The current business should have existed at least two years prior to the loan application. Having said that, it can be challenging for start-ups and enterprises to get funding, but it is definitely not an impossible scenario. Apart from the conventional bank loans, entrepreneurs have various financing options related to government funding.

Are Angel investors good for entrepreneurs?

Instead of placing a valuable stake of the company in the hands of strangers such as venture capitalists and Angel investors who do not do the important business work but want a share of the company, entrepreneurs can place complete trust within the government schemes such as PM Krishi Vikas Yojana for financing opportunities.

Passionate entrepreneurs should be able to display the technical and marketing skills to the representatives of these government schemes and make a good pitch, so that their company will prosper well and will be able to pay back the long term loan.

Government scheme loans may be requiring elaborate business plans and future revenue projections apart from the regular income tax returns during the application process.

What are the set of circumstances under which a business can apply for a long term loan?

The following is an exhaustive list of situations where start-ups and existing businesses find themselves in need of long-term finance:

• Expansion of business facilities
• Enhancement and remodelling of current facilities
• Acquisition of commercial real estate
• Acquisition of new business verticals
• Purchase of commercial vehicles
• Acquisition of state-of-the-art production equipment
• Purchase of inventory and raw materials
• Hiring corporate talent from the job market
• Refinancing of existing debt

What are the advantages of long-term business loans?

Small monthly payments

Long term business loans help companies to meet their large expenses in the form of affordable monthly payments

Low interest rates

Good credit scores can equip borrowers with favourable interest rates from the online lenders. The interest rates can be lowered up to 5% less than the base rate on long term loans

Consolidation of debt

Company directors can take long term loans to restructure their debt in such a way that high interest debt is paid off using the long-term loan

Factors to watch out for in a long-term loan

Dynamic interest rates hours need to be cautious when they see a dynamic interest rate on the loan agreements. The attractive during the initial stages of the loan but any factor patients and other macro-economic shifts in the market to increased interest rates and higher instalments

Overhead cost

Borrowers without an attractive credit rating can find themselves in an environment of high overhead costs. Careful calculations regarding the company’s future profitability need to be considered when signing up for the loan. Entrepreneurs need to keep in mind, the high quantum of processing fees and interest rates that can become a drag on the financial viability of the company in the future

Collateral requirements

Even though this is a justifiable business requirement, the condition for collateral security can limit the future financing options of the individual or company. In most of the cases, the collateral is required such as real estate or other valuable production equipment. Legal advice also needs to be taken by borrowers when they sign off their personal assets for a bank guarantee or even in cases when they are asked to sign a personal guarantee before the loan is disbursed.

Lengthy approval process

The process of getting approval for a long-term loan can take months if not weeks. It is not an ideal financing option for businesses with immediate funding requirements.

Where to find online business loans?

In the present booming credit market, it is not that difficult to get long term online business loans. There are two main sources for meeting the funding requirements of small businesses through long term loans.

1. Banks

Banks are the ideal choice for obtaining long-term online business loans due to the availability of decreased interest rates and favourable loan terms. However, the eligibility conditions of the banks to provide long term loans are quite strict. Credit scores barriers are remarkably high. The application of the loan and the subsequent procedures can be cumbersome, lengthy and full of bureaucratic red tape.

Banks pay close attention to the annual revenues of the businesses at the time of loan application to evaluate the repayment capacity of the borrower. The businesses which qualify for lending from banks are indeed fortunate as this gives them a heads up against other competitors in the market due to favourable lending conditions.

Processing Charges	Between Rs 1000 to Rs 2500
Chards of Repayment	Varies between the range of 2% to 6% on the total principal outstanding
Stamp Duty	Actual amount
EMI Interest	Close to 2 per cent monthly basis
Cheque Swapping rates	Rs 500 for every occurrence
Legal and related charges	Actual charges and non-refundable
Amortization Schedule Payments	Rs 200

 

2. Alternative lenders

These institutions have the same requirements as banks in most categories. However, the internal processes and approval mechanism are fast. The credit rating requirements are not strict, in a sense that borrowers with less-than-optimal score are also considered and not rejected outright.

Rate of Interest	From 13.5%
Processing charges	Up to a maximum of 3% of the total loan amount
Tenure of loan	Up to a tenure of 5 years
Lowest EMI applicable	Rs 2400 for 5 years

 

The only drawback of alternative lenders in case of online business loans is the incidence of higher interest rates. The repayment tenure by alternative lenders is at a maximum of 5 years. In addition to this, the interest rates can go up to 30% above the normal rate. These are some of the discouraging factors that need to be understood by prospective borrowers.

Availing a long-term business plan can be a smart Idea and can be seen as an affordable way out to take care of large expenses. Long term business loans do come with additional baggage and it is important to do background research before signing up for this type of loan. The most important parameters of interest rate and loan repayment tenure are to be closely followed as they have a definite bearing on the future profitability of the company. The end use of the funds needs to be evaluated on a practical basis by the entrepreneurs so that they do not overshoot their financial goals, which may result in future bankruptcy.