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A business loan in India is used for working capital needs, business expansion, equipment purchases, etc. If you are looking to get a business loan, one of the things that you will have to decide is whether it will be a long-term business loan or a short-term loan. For business owners, choosing between the two options depends on the loan amount they need sanctioned, repayment period, interest rates, etc. It also depends on the reason the company is seeking credit.
What is a long-term business loan?
A long-term business loan is credit borrowed with a long repayment period. The typical repayment period is two to five years, but some can go on as long as 25 years. These loans are borrowed generally for funding large investments like purchase of land, equipment, research and development, etc.
Usually, business owners opt for long term business loans when they need a huge sum of credit for their business expenses. The hefty debt is split into that are manageable by the company. You can sign up for monthly, bimonthly or any other scheduled repayment period according to the regulations followed by the lender.
Note: There are consequences of defaulting on loan EMI repayments. Ensure that you understand the terms of borrowing before availing a business loan.
Advantages of a long-term business loan
Given below are some advantages of long-term business loans:
- Higher loan amount
Businesses that apply for long-term loans ask for very large loan amounts, usually more than ₹50 lakhs. This is used to fund a large investment like the acquisition of high-cost machinery or the construction of a new building. Since you are borrowing a significant amount of money your repayment period will be spread out over a longer period of time to make it simpler for you to manage the loan.
- Repayment flexibility
Many financial institutions provide regular repayment options coupled with balloon payments in some cases to provide complete flexibility to their clients.
- Lower interest rates
Long term business loan interest rates will depend on several factors, including credit score, business history, financial situation, etc. Compared to shorter-term loan financing options, long-term loans tend to have lower interest rates. Some lenders will even reduce closing costs and other types of fees.
- Improves business credit
While taking on debt is risky for any business, sometimes it is the only way to maintain business continuity, purchase new machinery or launch an ad campaign. This credit flow keeps the business running and ensures that you don’t lose out in the competition.
- Flexible withdrawal of the loan money
The best long term business loans allow you to withdraw the whole money sanctioned at once or is disbursed in stages according to when the business owner wants to withdraw the money.
Disadvantages of a long-term business loan
Here are some disadvantages of borrowing a long-term business loan:
- Collateral required
Long term loans are often secured business loans and most lending institutions will ask you submit collateral to get the loan money sanctioned. If you are a small business seeking a long-term loan, there are several reasons why banks ask for collateral. Since you are taking out a large sum of money, this is the way lenders use to reduce risk of investment.
- Long approval process
Long term business loans have a long-drawn-out approval time because business owners ask for a huge sum of money. The lenders thoroughly go through every detail including credit history, financials of the company, annual turnover, loans borrowed, etc.
- Strict eligibility criteria
Long term loans are a risky investment and therefore, lenders have rigid eligibility criteria for sanctioning loans. Some might even include a higher credit score requirement.
What are interest rates for long-term loans in India?
The interest rates for business loans vary with each lender. Typically, interest rates of long-term business loans disbursed in India range from 18% to 30%.
Eligibility for long term business loans
Eligibility will differ based on the lender institution and the sum being borrowed. Apart from the questions lenders will ask to check loan eligibility, here are some factors that lenders use to determine your eligibility:
- A high credit score
- Annual turnover
- Number of years the business has been in operation
- Project proposal/purpose of the loan
- Brand reputation
- Previous loan repayments
How to find long term business loans suitable for your business?
There are banks, NBFCs, etc., providing long-term business loans. Visit the chosen lender’s website to get more information on loan products it is offering. Asking for a call back or sending the lender a mail would be a better option as you will be able to gather all the information regarding the loan.
Don’t forget to compare interest rates, other fees and terms and conditions of different lenders before choosing a business loan. You can also approach new age fintech companies for business loans. They offer reasonable financial loans with fast loan approvals and liberal eligibility requirements. You can also try out Business Loans by Tata nexarc to get a loan offer in 5 minutes with interest rates that start at only 13% p.a.
There are also government loan schemes that extend loans to businesses, especially small businesses at discounted interest rates. Schemes like MUDRA, Stand Up India, CGTMSE, etc., seek to fulfil the credit requirements of MSMEs by giving them easy and affordable credit facilities. Check out all the government funding policies and schemes before applying for a loan from a lending institution. Government schemes can save you money and help build brand reputation.