How to Obtain Long-term Business Loans: Overcoming the Challenges
If it is time to expand your business, you will need access to working capital to pay for new staff, materials, office space, marketing, equipment, and more. And while most new businesses begin with $10,000 or less, not every aspiring entrepreneur has the savings to get up and running. This is where long-term business loans come in.
However, like most good things, long-term loans do not come easily. Contrarily to a personal loan, they involve more risk for the lender, resulting in stricter eligibility qualifications. While many business owners want to obtain long-term financing, it may be challenging to get one. Moreover, it does not help that the internet is flooded with an overwhelming amount of information on long-term business loan qualifications. To cut through the noise and assist you secure long-term financing for your business, we have combed through all the challenges of acquiring long-term financing and how to solve the problem.
Long-term business loan lenders prefer businesses with a great credit score
Long-term financing often involves large sums. Thus, lenders prefer to work with businesses that already have a great credit score. They look at both personal and business credit scores and history. And since most small-business owners do not have business credit, it is hard to obtain long-term financing. In most cases, you will require a credit score of at least 600 to get the loan. Under the Fair Credit Reporting Act, you should get a free annual credit report from all the three main credit bureaus. You can get all three together or just space out your credit report over time.
Outside the major credit bureaus, many free credit reports and credit scores are floating around. But sadly, lenders of long-term loans do not use these when making credit decisions. Thus it is wise to get a personal FICO credit score, which you will have to pay for. Ninety-percent or more lenders use the FICO scoring system, so this is the credit score that actually matters.As long as you have a poor credit score and weak credit history, it will be hard to get long-term financing, but do not sweat it too much. There are many types of long-term business bad credit loans for borrowers with less than stellar credit scores. If you have a good credit score, watch out for an SBA lender, loans backed by the United States Small Business Administration since they are easier to qualify for, and often have low-interest rates.
Lenders will need a healthy steam cash flow for your business
Cash flow can make or break your company. A healthy and steady stream of cash shows the lenders that you can sustain the loan payments. This is essentially an indication of your business’s health. Apart from income, lenders will most probably look at expenses to evaluate how profitable your business is. If you lack sufficient cash flow or your business is new, it cannot be easy to acquire long-term financing.
If your business routinely deals with invoices, you have most likely experienced the headache of delayed payments. These unpaid invoices can have severe effects on the business’s turnover or cash flow. This can also make it challenging to obtain a long-term business loan. Luckily, there is a valuable funding option for business owners: invoice financing. Commonly known as accounts receivable financing, invoice financing is a financial transaction where a business sells its unpaid invoices to a third-party lender. Thus, instead of waiting for your clients to pay their invoices, you will be provided with additional cash flow to help you attain your business goals, pay operating bills, and meet payroll on time every month.
Age-of-business requirements for lenders restrict some businesses
About 20-percent of businesses fail within their first year. Thus it is no wonder why most online lenders and banks require a minimum business age from borrowers. New businesses often have difficulty acquiring long-term business loans since most lenders only lend to companies with a business record of not less than two years.Â
However, bear in mind that lenders will look at how long the business bank accounts have been open, and not how long the entity has been registered with the government. Without two years of business operation, you possibly will not get approved by banks and traditional lenders. However, various alternative online lenders have more lenient approval processes than traditional lenders, making them better options for start-ups or businesses with bad credit looking for long-term financing.
Lenders prefer businesses without too much debt
The other challenging factor is the current amount of debt. Borrowers and businesses with too much debt will have difficulty getting long-term financing. Lenders will look at debt to income ratio to evaluate the percentage of your monthly debt payments against your monthly gross income. Most lending institutions will require a debt-to-income ratio of 50-percent or lower. As you might have guessed, long-term loan providers are wary about lending to borrowers who already have other business loans. To prevent the slippery slope of debt, create fail-proof payment plans, and watch for high-interest rates.
Aside from a debt-to-income ratio, lenders will need to see a balance sheet. This document sums up your business’s financial health, which includes equity, liabilities, and assets. Generally, your total assets should equal the sum of all your equity and liabilities accounts. A balance sheet enables business owners to determine if they can spend money to grow or if they should reserve money and save for emergencies. Whereas it might appear overwhelming, maintaining a balance sheet is a vital task for every business. Besides, lenders will give your company bonus points if you go prepared with one.
To make your personal profile stronger, maintain a low balance on credit cards and lines of credit (often around 10-percent per account). A high credit card balance will not only make it hard to get a long-term business loan but will also hurt your credit score and affect your personal financial health. To avoid racking up your credit card balance and spending mindlessly. When businesses lack a financial track record, lenders usually require a personal guarantee from business owners. Even though you have an LLC, the lender can pursue you personally if you are not able to repay the loan. It is vital to note that not all loans are equal. Each loan holds different weights with the lender. However, if assets back your debt, you will get approved more quickly, despite your debt.
Collateral risks
Most long-term debt is tied to collateral. You often have to use the property as security to get funding, mainly at reasonable interest rates. For example, expanding your office loans are secured with your property as the collateral. Provided you are not able to repay the loan; you could lose the property to the bank. The same issue applies to equipment, real estate, and cars. Once you start losing assets through repossession, it becomes hard to dig your way out of the financial mess. This is not an ideal situation for new businesses or businesses with insufficient cash flow.
If you have to get a long-term business loan, be smart about it. When you can, use the money to buy income-generating assets. Developing multiple streams of income is not just a means of survival; however, it is also a strategy for building wealth. When you purchase an office complex or an existing business with a steady cash flow, your loan should pay for itself within a reasonable duration. Moreover, smart management can increase the asset’s income even more.
Customer concentrationsÂ
Most long-term business loan lenders, mostly banks, are often skeptical of businesses that report a significant bulk of their sales from a chosen number of customers. In general, lenders like to see diversity in a company’s clientele instead of the same customers; this makes obtaining long-term financing difficult to acquire. For instance, a restaurant or a local pub that depends mainly on its regulars for steady income can present a perception issue with traditional banks.
Economic concerns
No pun intended; however, banks and traditional lenders are always concerned with their own interests. They will not lend long-term loans to a business if they feel that the present economic conditions are adverse for getting the money back timely. This puts an unfair burden on businesses to maintain revenues and keep costs down when the economy takes an unfavorable turn.
Insufficient management team
Your business might be rejected for long-term financing if you do not have strong top-level leadership with a noticeable chain of command because that can bring concerns about the long term success of a business or its organizational integrity. When it comes to obtaining a long-term business loan, many challenges come with the process. Whereas you might think you need a high annual income or perfect credit score to get long-term financing, most lenders consider several factors. If you are lacking in one category, such as a low credit score, you might be able to secure a long-term loan if you are strong in another area, such as a lower level of existing debt. Typically with proper preparation and small financial decisions, you can increase your odds of quick loan approval.
