Long-term debt may be a great tool for small businesses to use in order to grow and sustain their operations. Through long-term debt, businesses may be able to finance working capital, inventory, equipment, and even refinance existing debt. Ten-year loans are the most common type of long-term debt used by small businesses as they provide more flexibility and terms than shorter duration loans.
The benefits of long-term debt
For many consumers, the word “debt” causes anxiety. Being “in debt” is usually seen as a negative where being “out of debt” is an accomplishment to be celebrated.
For small business owners however, long-term debt may be a positive. Businesses are able to finance working capital, inventory, equipment, and even refinance existing debt. Additionally, paying off long-term debt responsibility may improve your credit score over time, making you eligible for better loan terms in the future.
If you’re in need of outside funds, consider applying for a business loan with long terms, like an SBA loan. Here’s more information about this funding option and how it may be able to help your unique business.
What is long-term debt?
Long-term debt consists of loans and other financial obligations lasting over one year. Ten year loans are the most common type of long-term debt used by small businesses as they provide more flexibility and terms than shorter duration loans. Long-term debt for a company would include any financing or leasing obligations that are to come due in a greater than 12-month period. Terms of long-term debt may stretch to 20 or 30 years depending on the individual lender and use of funds. Long terms typically have another advantage: low monthly payments. For example, the payment for a $200,000 low-cost SBA loan from SmartBiz® is only $2,698 per month.
Build business credit
The SBA reports that the inability to obtain funding as a leading cause of small business failure. Having excellent business credit is crucial to obtain long-term debt funding with low rates. If you have obtained long-term debt financing, you typically increase the likelihood of qualifying for additional funds. As an added benefit, when you build your company's credit, you may reduce the need to rely on your personal credit.
Long-term debt helps fuel growth
SmartBiz offers low-cost SBA loans with long terms. Small business owners who work with SmartBiz disclose how the funds will be used during the application process. Some growth-building uses of long-term debt include buying inventory or equipment, hiring new workers, increasing marketing and more.
Long-term debt may save money
Often, small business owners rely on expensive debt – like credit cards with sky-high rates or cash advances – to get their business off the ground. Unfortunately, this type of debt often cuts into cash flow and may hinder day-to-day operations. SBA loans may be used to help small business owners refinance existing high cost debt. One SmartBiz customer is saving over $15,000 as the result of refinancing and paying off high-cost, short-term debt.
Long-term debt may eliminate reliance on expensive debt
There are lenders who use aggressive sales tactics to get businesses to take out short-term cash advances. Some businesses in need of funds will take five or six cash advances in a row. Some of these loans may trap a borrower into a debt cycle with no end in sight. Instead, consider looking into an SBA loan. SBA loans have low interest rates, long terms, and low monthly payments. Many have no prepayment penalties. SBA loans may be used to help small business owners refinance existing high cost debt if you’re caught in a trap.
Long-term debt is typically more predictable
Many loans are calculated using variable interest rates, which refers to rates that are partially set by the Federal Reserve. This means that payment on the interest rate can fluctuate several times before a loan's maturity date. Though often less expensive in the long run, variable- interest loans may make it difficult to plan for consistent monthly payments.
On the other hand, long-term bank loans typically come with fixed interest rates set in the terms and agreements. A fixed rate typically makes monthly payments more predictable, allowing you to more effectively manage your business finances in a sustainable way.
Long-term debt may reduce the need for investors
Small businesses often rely on investors to fund their growth. Generally, investors provide a certain amount of working capital and, in return, receive a certain amount of control of the company. While their involvement may prove beneficial in the long term, how much they aid the business typically varies from investor to investor. Additionally, some business owners may prefer to keep complete control over their venture.
Long-term loans may provide the funding that a company needs, with repayment being expected in return. With debt financing, a company may reduce or avoid the need for investor financing.
Long-term debt may help you avoid using your profits
Many businesses use funds from long term loans to avoid dipping into their own profits. Saving up for big expenses such as new employees or more advanced equipment may interrupt your business’s normal cash flow. Your finances will usually become tighter for however long it takes to make the purchase. That may be tough – a sudden drop in revenue could put you back at square one. Using a loan to fund your business expenses means your company may better sustain its normal cash flow while pursuing growth.
Let SmartBiz help you find a long-term loan
Loan plans often differ from lender to lender, which means that not every plan will match your company’s financial needs. It may be challenging to understand a loan’s details before filling out an application, but SmartBiz may be able to help.
SmartBiz requires only one application, which it uses to help match your company with several local lenders. From there, it helps you narrow down the choices until you find the one that’s right for your situation. Check now whether you pre-qualify* for a long-term loan to grow your business today, tomorrow, and long after.