Not all debt is bad debt. In fact, some of the most successful small businesses use debt to scale and sustain their operations. By using long-term debt, you may be able to finance inventory, equipment, and working capital. You might even be able to refinance existing debt to lessen your monthly expenditures. In the business world, 10-year loans are the most common type of long-term debt, largely because of the flexibility that they offer.
What is long-term debt?
The term long-term debt refers to financial obligations that last more than one year. Ten-year loans are the most common type of long-term debt that small business owners use, largely because they provide more flexibility than short-term loans. Terms of long-term debt can stretch to 20 or 30 years, depending on the lender, the type of loan, and what the funds are being used for.
The benefits of long-term debt
There’s a lot of misconception surrounding debt. Even among small business owners, debt is usually seen as a bad thing, while being debt-free is considered successful. However, long-term debt can actually be a positive. In addition to the resources that you can finance, being responsible about making payments on your long-term debt can boost your credit score, which makes you eligible for loans in the future.
Long-term debt has another advantage: lower monthly payments. For example, if you borrow $200,000 on a short-term loan, your monthly payments would be more than $20,000 each month. However, if you stretch that over the course of several years, such as an SBA loan from SmartBiz®, you would pay a little more than $2,000 per month.
If you need a cash infusion for your business, consider applying for a business loan with longer terms, like an SBA loan. Let’s take a deeper look at some of the benefits of long-term debt.
Build business credit
Many small businesses fail because they cannot obtain the funds that they need. Having excellent credit is crucial when you need to obtain long-term financing with favorable interest rates. If you have been approved for one long-term loan, you may greatly increase the odds of being approved for a loan in the future. Building your business’s credit score may also help you avoid having to use your personal credit to get the funds that you need.
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, which is a requirement set forth by the SBA. Some growth-building uses of long-term debt include buying inventory or equipment, hiring new workers, ramping up marketing efforts, and more.
Long-term debt may save money
Small business owners who want to avoid taking out loans often turn to credit cards, cash advances, and credit lines to get working capital. Unfortunately, those types of debt come with high interest rates that can cripple your business in the future.
That’s why SBA loans are a popular option. These loans can help small business owners refinance high-cost debt. For instance, one SmartBiz customer is saving more than $15,000 by refinancing their short-term debt with a long-term SBA loan.
Long-term debt may eliminate reliance on expensive debt
Unfortunately, some unscrupulous lenders may use aggressive tactics to get small business owners to take out short-term cash advances. This may spiral into something far worse as some businesses that need an influx of cash often take out five or six cash advances in a row. This generally traps the borrower in a cycle of debt that they cannot get out of on their own.
If you’ve been thinking about a cash advance, consider an SBA loan instead. While it’s a form of long-term debt, this type of loan has lower interest rates and lower monthly payments. To make things even more appealing, many of them have no prepayment penalties. If you’ve been stressed about the debt trap that you’re caught in, an SBA loan might be the escape that you’ve been searching for.
Long-term debt is typically more predictable
Many types of loans are calculated using variable interest rates, which means that the rates are partially influenced by the Federal Reserve. Payment on that interest rate may fluctuate wildly, often several times before the loan reaches its maturity date. While it might be cheaper in the long run, variable interest rates may also make the loan more expensive in the future. This uncertainty also makes it much more difficult to plan for consistent monthly payments.
Long-term loans typically have fixed interest rates. This means that you will know how much your monthly payment will be 10 years in the future, allowing you to manage your finances in a more sustainable way.
Long-term debt may reduce the need for investors
Small businesses often bring in investors to fund growth. Unfortunately, investors provide a certain amount of working capital in exchange for a percentage of the company. While their involvement can prove beneficial, there’s no guarantee that an investor will actually make the business better. Not only is this a risk, but some business owners simply don’t want to relinquish any control over their venture. If you started your business from the ground up, the idea of handing over some control can feel like you’re giving up a part of yourself.
If your business isn’t ready for investors, or if you don’t like the idea of handing over some control, a long-term loan may be the right choice for you. Instead of bringing in an investor who may want a significant amount of equity, a long-term loan allows you to maintain complete control.
Long-term debt may help you avoid using your profits
Many business owners use long-term loans to fund the business instead of dipping into the profits. Trying to save profits to fund big expenses, such as new hires or advanced technology, can interrupt your company’s usual cash flow. This means that a sudden drop in revenue may completely freeze your progress. Using a loan to fund your business expenses means your company may better sustain its normal cash flow while pursuing growth.
Let SmartBiz Bank help you find a long-term loan
SmartBiz Bank understands that every loan application is as unique as the businesses that it represents. That’s why we work so closely with business owners from virtually every industry to get them the funds that they need. See if you pre-qualify today for a low-cost SBA loan to help fuel your business growth.
