Long-term loans

These loans differ from short-term loans in more than just length – they’re often more complex and demand more from companies taking them out. So let’s dive into everything you need to know about long-term loans, from their key features to how they can work for you.

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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 they are often secured against an asset like property or equipment. This makes them ideal for big-ticket investments, like 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 that need to make substantial investments without straining their cash flow. Think of investments that will deliver big value, but might take time – so require more time to repay. 

If you’re planning to buy expensive equipment, expand your location, or finance a large project that will take time to generate returns, a long-term loan allows you to spread the cost over several years, making each monthly payment more manageable.

Types of long-term loans

Long-term loans come in various forms, each suited to different needs:

1. Secured long-term loans

These loans require collateral, such as property or equipment. Because the lender has this security, they typically offer lower interest rates. However, the risk is that if you fail to make repayments, the lender can take the collateral.

2. Unsecured long-term loans

These loans don’t require collateral but often come with higher interest rates due to the increased risk to the lender. They are usually available to businesses with a strong credit history and solid financials.

3. Mortgages

While typically associated with buying property, mortgages are essentially long-term loans with very specific use: real estate. If your business needs new premises, a commercial mortgage can be an appropriate 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. The interest rate can be either fixed or variable and these loans are normally secured loans.

• 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: Your payments 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.

Repayments are usually monthly and include both the principal (the amount borrowed) and the interest. Because you’re spreading the cost over many years, your monthly payments are lower compared to shorter-term loans, which can help you budget for your cash flow.

Advantages of long-term loans

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

1. Lower monthly payments

Because the loan is spread out over many years, each payment is smaller and more manageable, which helps maintain 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 because the lender’s risk is reduced by the collateral. Even unsecured long-term loans can offer competitive rates, 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.

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.

How to apply 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 lenders. 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 application along with all required documentation. Some lenders offer online applications, making the process quicker and more convenient.

Long-term loans vs short-term loans

Businesses use different terms of loan 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, while long-term loans are more suitable for substantial investments that will pay off over time.

Comparing costs and benefits

Evaluate the total cost of the loan, 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.

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.

How an iwoca loan can help you grow 

When it comes to investing in your business, flexibility and speed are key. While long-term loans can be a valuable way to unlock large volumes of capital, they also tie up your business in long-term agreements, commitments and interest payments.

A short-term loan can help you react faster to changes in your business environment, whether that’s changing priorities, cash flow issues or trends in your market. 

That’s why iwoca offers flexible loans based around the needs of small businesses.  We ensure SMEs can get the funds they need quickly, transparently and fairly, with no  collateral required.

Why choose iwoca?

• Borrow £1000-£500,000 for up to 24 months 
• Apply in minutes and get approved within 24 hours
• No long-term commitments, and we’ll never charge you for repaying early ,so you can save on interest.

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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, which means your monthly payments will be lower. 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 of time, 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 some extra work to demonstrate your ability to repay. This might include offering collateral as security, finding a guarantor, or paying a higher interest rate.

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