What is a Long-Term Business Loan?
A long-term business loan is a form of business finance where the repayment structure is typically longer than one year. These loans often provide larger amounts of capital to fund significant purchases or investments. Long-term business loans, such as a commercial mortgage where the loan is secured against a high-value asset are sometimes repaid over terms as long as 30 years.
Here are a few typical examples and use cases of long-term business loans:
- Long-term business loans for commercial property may have 10-25 year terms, due to the long-term security of the property
- Working capital loans are typically short-term (under two years), but lenders may stretch to five or six year terms in specific cases if there is property as security or a personal guarantee (PGI can insure against this)
- Asset refinance allows businesses to release equity, and asset finance lenders typically go up to seven year terms
- Large business loans (over £1m) can be on a structure known as asset-based lending (ABL), where the lender looks at various assets on the balance sheet to form a debt structure - these terms are typically open to negotiation
Long-Term Business Loans vs. Short-Term Business Loans
There is only one real reason to consider a long-term business loan over a short-term business loan: the size of monthly repayments.
Structuring a loan to be repaid over a longer time means that each repayment is smaller. This puts less stress on cashflow, while providing access to larger sums. It is part of the flexible nature of business loans that should be considered when looking for long-term finance.
While there are more factors to take into account than simply the size of the loan, such as interest rate, loan set-up and administration fees, and the potential need for collateral, a long-term business loan can be seen as a way of borrowing more money with smaller regular repayments.
The Advantages of Long-Term Business Loans
Businesses never stand still. A good way to look at a business is that you are either growing or you are shrinking, and shrinking is very rarely the direction you want.
But expanding needs capital - it can’t just be done through force of will alone and no matter how much effort you put in, eventually you will need cash. Loans are a well-established way for companies to access capital to invest, and the idea is that as the company expands and income grows, repaying a loan becomes easier and easier.
A long-term loan, with its low-but-long repayment structure, can take maximum advantage of this growth plan while putting a minimal amount of strain on current and short-term finances to allow the business to build until repaying the loan is almost insignificant.
Yes, there is a commitment to keep up with payments for multiple years, but when that responsibility is easily met, the value of the long-term nature of the loan is easily identified.
Because of the way your business debt service is calculated, it is possible to get a far larger long-term loan than any short-term option. This is especially useful if trying to make a significant investment, such as a property purchase or obtaining expensive specialist equipment.
Perhaps the most recognisable long-term loan is that of a commercial mortgage; a long-term loan tied to property as collateral that allows a business to expand and grow its assets without putting too much pressure on monthly cashflow.
DSCR: A Key Factor for Long-Term Business Loan Approval
As discussed, the fundamental difference between a long-term and short-term loan is of the size of your monthly repayments. In technical terms, it affects your business' debt service coverage ratio (DSCR).
DSCR is a calculation of how much your business is responsible for repaying each month. This is known as your debt service (DS), which is then measured against your net operating income (NOI). The ratio is calculated as NOI/DS.
So, if you have a debt service of £6,000 per month and a NOI of £10,000 per month, your DSCR would be 10000/6000 = 1.67.
The higher your DSCR the better. Companies with a DSCR >2 would find it quite easy to take on a long-term business loan, while those with a DSCR <1.25 may struggle to get approved.
As long-term loans spread the cost of repayments over many years, the monthly debt service for them is low - often lower than existing short-term loan responsibilities. So, even though the total owed on a long-term business loan is greater, the impact to the business is far smaller.
7 Considerations on Long-Term Business Loans
1. Collateral
While many short-term business loans are unsecured, meaning there are no asset-based guarantees leveraged against them, long-term business loans are typically secured loans.
In many cases, the asset that is used as collateral is one that is purchased with the loan (as in the case of a property leveraged against the mortgage), but this does not always need to be the case with alternative assets often suitable to use for a guarantee.
Remember, any assets used to guarantee a loan are at risk if you do not keep up with your loan repayments.
2. Loan-to-Value
When obtaining a long-term business loan, the size of the loan is limited by the value of the assets used as collateral. Loans are typically from 75% to 90% loan-to-value (LTV), thus, a loan of £300,000 would require between £334,000 and £400,000 in tangible assets to secure.
A long-term business loan used to purchase a high-ticket asset, such as specialised machinery or commercial property, will be limited by its LTV and additional capital will be needed to purchase the asset in full. This additional capital is typically called the deposit or down payment.
3. Interest Rates
One of the advantages of a long-term business loan is the lower rate of annual interest, often advertised with AER as much as 10 times lower than an unsecured business loan, long-term loans can seem to have extremely affordable interest rates.
However, as the loan is repaid over many more years, the total amount of interest accumulated over the lifetime of the loan will be either comparable or greater than that of the short-term loan.
4. Inflation
Another factor to consider is that of inflation - something that is typically to the benefit of the borrower. The value of money drops slowly over time, with £100 today worth less (in terms of real buying power) than it was ten years ago. Effectively, this means that the cost of your loan repayments will be somewhat smaller as time goes on.
Using data from 1994 to 2024 as an example, the value of £1,000 thirty years ago would have the same buying power as almost £2,500 today. Looked at in reverse, a loan repayment of £1,000 per month for a loan obtained in 1994, would have as much impact on the business as a repayment of a little over £400 today.
The impact of inflation can often offset the cost of interest rates to a significant level and is worth considering when looking into long-term business loans.
5. Early Repayment
Your business may want to release itself from its debt obligation earlier than planned. It is important to look at the terms of your loan contract to understand whether this can be done and if so, what fees are applicable.
Many business owners and directors have mistakenly rushed into long-term loans without understanding (or caring about) the early repayment penalties. Years later, such short-sightedness can be problematic.
It is valuable to understand these longer-term impacts before finalising any long-term business loan.
6. Fees
Early repayment fees are not the only additional costs of many long-term business loans. Many loans have set-up and administrative fees to cover the lender's costs when assessing your business suitability for the loan. This is especially true for asset-based loans where asset valuation and due diligence are essential.
7. Government Help
Some long-term business loans can be secured thanks to government-backed business initiatives. It is worth discussing your options with your loan advisor to see if you would be eligible for a more significant loan thanks to these schemes.
4 Tips for Getting a Long-Term Business Loan
Securing the right loan for your company is important. With multiple different long-term options available for business in the UK, it’s essential to not rush into the first deal that seems worthwhile.
1. Use an Independent Finance Broker
At Clifton Private Finance we offer a comprehensive broker service to help your business get the perfect long-term business loan. Using a broker gives you a wealth of experience and ensures that you get a loan that best suits your needs.
Just as you would consult a specialist in many other aspects of your business, it makes sense to use a finance broker to get the right loan. Contact us at Clifton Private Finance for expert advice and access to the widest market of lenders.
2. Write a Robust Business Plan
Long-term business loans are assessed by lenders with some strict criteria and an eye on your business's longevity. Your business plan is the surest way to present your company in the best possible light, showing your long-term path as well as clearly showing your financial forecast. You must have a professional business plan.
3. Build a Strong Credit Report
Your business credit history is going to be under scrutiny, so make sure it’s healthy. If you have had a few troubles, it’s worth smoothing these out and waiting a few months before making any significant loan applications to show that you’re on the right path.
4. Clear Existing Debts
Debt service is a factor in the size of the loan you will be able to take on, so improve your DSCR by clearing what can be easily paid off. This will put your business in the position of being able to access larger and more attractive long-term business loans.
How to Apply for Long-Term Business Loans
You can apply for a long-term business loan directly with a lender, or speak to a specialist business finance broker. A specialist broker will conduct a fully independent, whole-of-market comparison to match you with the right finance solution on the best possible terms.
Contact our expert team at Clifton Private Finance to discuss your business needs and we will help find the best long-term business loan for you. With decades of experience in obtaining structured loans for business operations, we will compare multiple lenders and offers to find the most suitable. Discuss your needs with us today.
Our long-term business loan service provides:
- Market-leading rates
- Fast service - finance within 5 to 7 days
- Access to specialist lenders
- Expert advice - professional service
