When to use long-term loans for your business

Many businesses look to long-term loans to spread the cost of high-value purposes or support ongoing working capital needs. However, entering long-term finance agreements means committing to ongoing debt that can be a burden and a risk if not managed effectively or if market conditions change significantly. 

In this article, we discuss both the advantages and drawbacks of long-term business loans, their key features and the circumstances in which shorter-term finance solutions may be more suitable. 

What is a long-term loan?

A long-term loan is a type of financing that is repaid over an extended period, typically lasting more than five years and sometimes up to 30 years. 

These loans usually involve borrowing a larger amount of money and are often secured against assets like business equipment, vehicles or property. This makes them ideal for big-ticket investments, such as purchasing new premises or undertaking a major expansion project​.

Who can benefit from a long-term loan?

Long-term loans are particularly beneficial for businesses needing to make substantial investments without straining their cash flow. Think of investments that are likely to deliver significant value, but might take time, so require more time to repay. 

If you’re planning to buy high-value equipment, expand your premises or finance a large-scale project (that will take a while to generate returns), a long-term business loan allows you to spread the cost over numerous years, making manageable monthly payments.

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Types of long-term loans

Long-term loans come in various forms, each suited to different needs. Here are the main options to consider:

1. Secured long-term loans

A long-term secured business loan requires assets, such as property or equipment, to use as collateral. This security reduces lender risk, meaning they typically offer lower interest rates than unsecured loans. However, if you fail to make your loan repayments, the lender can take possession of the assets.

2. Unsecured long-term loans

Adversely, unsecured business loans don’t require collateral but often come with higher interest rates due to the increased risk to the lender. However, they are attractive due to the speed of funding and the flexibility offered, particularly those provided by digital lenders, like iwoca. 

Unsecured loans are more commonly used for shorter-term funding needs, but some lenders offer longer repayment terms. 

3. Mortgages

While typically associated with buying property, mortgages are essentially long-term loans with a very specific use: real estate. If your business needs new premises, a commercial mortgage can be a suitable long-term solution.

How do long-term loans work?

Long-term loans operate on a simple principle: you borrow a lump sum of money, which you repay over a set period in regular instalments. Business loan interest rates can be either fixed or variable, and long-term loans are normally secured.

• Fixed interest rates: Your monthly payments remain the same throughout the loan term, providing stability and predictability. This is great if you prefer to have a consistent repayment schedule.
• Variable interest rates: Repayments can fluctuate based on changes in the market interest rate. While this could mean lower payments if rates drop, it also carries the risk of increasing your payments if rates rise.

Loan repayments are usually monthly and include both the principal (the amount borrowed) and the interest. Because you’re spreading the cost over many years, monthly payments are lower compared to shorter-term loans, which can help you budget for your cash flow, but it does mean a longer period of incurring interest.

Advantages of long-term loans

Long-term commercial loans come with several benefits that can make them a suitable choice for certain uses and business types:

1. Lower monthly payments

As long-term loans are spread out over many years, repayments are smaller and more manageable, which helps maintain a steady cash flow. This can be particularly useful if your business operates in an industry with seasonal income fluctuations​.

2. Access to larger amounts

Long-term loans typically allow you to borrow more compared to short-term loans. This makes them ideal for larger projects and significant investments that can yield larger returns over time.

3. Potentially lower interest rates

Secured long-term loans usually come with lower interest rates, as the collateral used reduces lender risk. However, even unsecured long-term loans can offer competitive rates, especially for long-term repayment schedules, making them an affordable way to finance big purchases.

4. Flexibility in repayments

Many long-term loans offer some flexibility in repayment terms, allowing you to tailor the loan structure to your business’s cash flow cycle. Some lenders also offer options to make additional repayments without penalties, helping you save on interest if your financial situation improves. For example, iwoca enables fee-free early repayment options.

Disadvantages of long-term loans

While long-term loans offer numerous advantages, there are also some potential downsides to be aware of:

1. Higher total interest cost

Even though the interest rate on a long-term loan might be lower, the fact that you’re paying interest over a longer period means you could end up paying more in total. It’s important to consider the full cost of the loan, not just the monthly payments​.

2. Collateral risk

If you’re taking out a secured loan, your assets are on the line. Failing to meet your repayment obligations could result in the loss of these assets, which might include vital business equipment or property.

3. Less flexibility for future financial changes

A long-term loan is a long commitment. If your financial situation changes, whether it’s an increase in income or an unexpected downturn, you may find the loan either too rigid or too expensive to maintain. Some loans also come with early repayment fees, which can limit your ability to pay off the loan sooner than planned.

Long-term loans vs short-term loans

Businesses use different terms for loans for different purposes – the right term will depend on your business and what you plan to do with the capital.

Business needs and loan duration

Consider the specific needs of your business. Short-term loans are typically better for immediate, smaller-scale projects and needs, while long-term loans are more suitable for substantial investments that will pay off over time.

Comparing costs and benefits

Evaluate the total loan cost, including interest rates, fees, and the impact on your cash flow. Sometimes, a long-term loan with higher total interest costs might be more manageable than a short-term loan with higher monthly repayments. 

Also, you may get more flexibility and faster access to funds with a short-term loan, so suitability depends on the urgency of your funding needs and how much control you require. With an iwoca Flexi-Loan, while you agree on a loan amount and repayment period, you can repay early (without additional fees), and you only pay interest when you draw down funds, as and when required.

Risk assessment

Assess the risks associated with each type of loan. For example, if your business operates in a volatile market, a short-term loan might be less risky, as it reduces the exposure to long-term financial commitments.

Impact on your debt service coverage ratio

A long-term business loan can improve your debt service coverage ratio (DSCR) initially, as spreading repayments over more years lowers monthly debt obligations. Smaller monthly payments compared to those in short-term loans can strengthen your cash flow relative to debt service. However, the longer repayment period means higher overall interest costs (and with potentially rising rates), so if your revenue dips, your DSCR could weaken over time.

Consider the total cost of borrowing, which can be much higher with long-term loans, since interest accrues over more years, and weigh up the short-term cash flow benefits against long-term expenses and ongoing debt burden.

How to get a long-term business loan

You can get long-term business loans from numerous sources, including high-street banks, financial institutions, specialist brokers and digital lenders, who offer a variety of options with terms and rates to suit different business needs. 

Scope out your key funding needs and goals, assess your financial health and explore different lender websites to see what features and benefits they offer, and the rates and fees they charge. Also, many websites have eligibility checklists to help you quickly see whether you meet the requirements before applying.

Using a bank, broker or private lender

Banks and traditional lenders offer well-established long-term business loan solutions, often with competitive rates and structured repayment terms. However, the application process can be time-consuming, and eligibility criteria are typically stricter than those of private or digital lenders.

Using a finance broker will provide valuable guidance and industry expertise, helping match you with the most suitable loan product for your needs, but you’ll pay broker fees in addition to standard loan fees and charges.

Alternative finance providers can speed up funding, offer access to a broader range of loan products and provide more flexible terms, though interest rates and fees can be higher than those from traditional lenders.

Learn more about the differences between business loans offered by banks and alternative lenders in our dedicated guide.

Applying for a long-term loan

Applying for a long-term loan is relatively straightforward, but being well-prepared can help smooth the process:

1. Gather necessary documents

You’ll need financial statements, tax returns, details of any existing debts and a clear plan for how you’ll use the loan. If you’re applying for a secured loan, you’ll also need documentation for the collateral.

2. Compare lenders

Long-term loans vary widely. Take the time to compare interest rates, terms and fees from different loan providers. Look for a lender who understands your business and offers support that aligns with your needs.

3. Check your eligibility

Before you apply, check your credit score and review your financial statements. This will give you a clear idea of what lenders will see and help you address any potential issues before they become obstacles.

4. Submit your application

Once you’ve chosen a lender, submit your long-term loan application along with all required documentation. Some lenders offer online applications, making the process quicker and more convenient. For example, with iwoca, you can apply in minutes, with minimal documentation, and get a funding decision within 24 hours.

How iwoca can support your short- and longer-term finance needs 

When seeking finance for your business, speed, flexibility and transparency are key. While long-term loans can be a valuable way to unlock large volumes of capital, they also mean lengthy commitments and greater interest costs over time. So, it’s important to judge the most suitable repayment period and loan structure.

At iwoca, our Flexi-Loans are designed to support UK SMEs in their growth ambitions and cash flow management. We understand the varied challenges and offer flexible funding tailored to your needs and aligned with your cash flow. 

While our loans are unsecured, we offer wider repayment term ranges compared to most other unsecured loan providers, from 1 day to 60 months, to cater for temporary, short-term and longer-term funding needs. 

Why choose iwoca?

• Borrow £1,000–£1 million for up to 60 months. 
• Apply in minutes and get approved within 24 hours.
• No collateral required.
• Only pay interest on funds you draw down and repay early free of charge to save on unnecessary interest costs when your circumstances change.

Find out how to apply for a business loan with iwoca or use our handy loan calculator to see your likely monthly repayments. 

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Long-term loan FAQs

Are interest rates higher for long-term loans?

No, long-term loans usually have lower interest rates than short-term loans. However, this doesn’t necessarily mean the overall cost of the loan will be less. Since you’re paying back the loan over a longer period, you’ll have more time to accrue interest. 

Can I get a long-term loan with bad credit?

Businesses and individuals with less-than-perfect credit can get a long-term loan, but it may require extra work to demonstrate the ability to repay the capital. This might include offering collateral as security, finding a guarantor, providing a compelling business plan and projections or paying a higher interest rate.

Is it harder to qualify for a long-term loan compared to a short-term loan?

Long-term loans often have stricter eligibility criteria than short-term loans. Lenders often want to see strong credit history, steady income and proven debt management. As the lender is enabling a longer repayment period, they’ll want greater assurance that you can maintain consistent payments for the loan’s duration.

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