Medium to long term business loans are a big commitment for any business, but can unlock or accelerate growth. Due to their size and duration, it's important to secure the best available loan terms.
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Scaling up a business usually requires a significant amount of capital, and for many small businesses, speed and agility are paramount. When waiting around for capital to become available isn’t an option, many businesses will look to a business loan.
Spreading the repayment of a business loan over a lengthy period allows you to keep monthly repayments affordable, but generally speaking, the longer you borrow, the greater the overall cost of borrowing. From a lender’s point of view, a longer loan term means a greater opportunity for your business to have a lean period in which it might struggle to make a repayment. So for this reason, you’ll need to show a reasonable history of financial stability in order to get approved. If you’ve only been trading for 6 months, don’t expect instant approval on a 5 year loan.
When borrowing for a number of years, the interest you’ll pay will be substantial, so it’s worth shopping around for the best deal you can get. Here’s how to find the right type of finance, how to apply and some important hurdles to watch out for.
How do long term business loans work in the UK?
It’s generally possible to apply for a business loan online in a matter of minutes. As well as providing details to identify your business, (company type, registered address, limited company number etc), you’ll normally need to submit VAT returns and bank statements. You’ll also be asked how you’re planning to spend the loan.
Sometimes, you’ll be given an instant decision on your application, but naturally, for larger sums and longer terms or in situations where there’s a greater perceived risk, lenders are likely to want to take a closer look at your business. In these cases, getting a decision might take a couple of working days, and might require a discussion with an underwriter. Once approved, you can often expect to have your funds credited on the same business day.
In some cases a personal guarantee will be required – that’s when an individual promise that, if it came down to it, they would use their own money/assets to repay the loan. Alternatively, lenders may require a loan to be secured on business assets, such as property, vehicles or equipment.
Fixed vs variable rates
Most medium to long term business loans come with a fixed interest rate. That means the rate will stay the same for the duration of the loan and you’ll know in advance exactly how much the loan will cost each month and overall, which is particularly handy when planning budgets. Always check if the loan you’re considering comes with a fixed or variable rate attached.
Variable rates can sometimes be more competitive but typically fluctuate with general shifts in the economy. If the Bank of England Base Rate increases or decreases, variable interest rates typically follow suit. However, this is always at the lenders’ discretion.
Don’t forget that rates are almost always tailored to the company. That means that if the lender thinks your business is a pretty safe prospect for lending to, chances are it will offer you the advertised representative APR. If it deems the loan to be more risky, you will likely be offered a “personalised” (higher) rate. Lenders are obliged to offer the advertised representative APR to 51% of borrowers.
How can a medium to long term loan benefit my business?
Speedy access to large lump sums. As they always say in business, if you’re not moving forward, you’re moving backwards. A medium to long term loan gives you quick access to the capital needed to scale your business before your competitors overtake you.
Low monthly repayments. Broadly speaking, the longer the term of your loan, the lower your monthly repayments will be. New or expanding businesses may particularly appreciate this, as they will be likely to have many other costs to meet at this time.
A safety net for peace of mind. Many business owners want to be sure they will have funding available to support their company and its employees for several years. Loans with fixed rates mean that business owners can budget with a greater degree of certainty.
How to choose the best medium to long term business loan
Consider the following key factors when weighing up multiple lenders:
Loan amounts available. Can the lender accommodate the loan amount that you have in mind?
Loan terms available. The term of your loan will typically be determined by how much you can afford to repay each month. Broadly speaking, the longer the term, the lower the monthly instalment but the greater the overall cost of borrowing.
Interest rate. Most lenders can now show you your personalised rate without any impact on your credit score – you’ll simply need to provide some basic details to identify your company. Don’t forget to check whether the rate being offered is fixed or variable.
Fees. Does the lender charge an application or product fee? Are there any other fees?
The overall cost of the loan. The overall cost of the loan is one of the most important benchmarks since it takes into account each of the factors listed above. Aim to keep this figure as low as possible while ensuring the monthly instalments would be comfortably affordable.
Eligibility. Each lender will have its own minimum criteria for your application to be considered. These typically involve the company’s turnover and how long it’s been trading.
Flexibility. It’s harder to predict how cashflows will change over longer terms. Will the lender that you have in mind let you “top-up” your loan should you need to? Does it offer “repayment holidays”? Can you repay some or all of the loan ahead of time? If you do so, how much will it save you? If your business’s cashflow is more prone to variation than others, flexibility may be worth more to you than a fractionally better interest rate.
What to watch out for
Can be expensive. The overall cost of your loan will usually be larger if you’re paying interest for a longer time.
Security. Many medium to long term lenders require you to put your business’s assets up as collateral, or to give a personal guarantee, to cover them in the case of unpaid loans. This means you may have your assets repossessed if you fall behind on your repayments.
Can be a debt trap. With any long term loan, there’s a risk of your business’s circumstances changing during the term of the loan. Repayments that seem affordable now may not be if business takes a turn for the worse.
Fees. While administration fees are all but extinct in the world of personal loans, in business finance, they are more common.
Medium to long term business loans and business credit scores
Yes, businesses have credit scores too, and lenders will use these to assess the chances of getting their money back.
Your business credit score is calculated by credit reference agencies based on information in your business credit file. This includes your borrowing history, previous credit applications, current debt, debt payment history and the number of years the company has been in business.
There are a number of credit reference agencies in the UK, and each will use a different algorithm to calculate a credit score for your business. Lenders use the information in your credit file in conjunction with their own affordability and risk assessments when weighing up your application.
Since the success of your application may depend on which credit reference agency your lender uses, plus the peculiarities of their internal checks, it’s sometimes worth applying to a different lender if your initial application is rejected. Just remember that each application for credit will involve a full credit search and will have a small (and usually short-lived) effect on your credit score, so don’t apply for too many in a short space of time.
To maintain a healthy business credit score:
Ensure you make timely repayments on your existing lines of credit.
Don’t open too many lines of credit.
Don’t push your existing lines of credit too close to their limits.
What alternative options are available?
There are many different types of business finance available. The best option for you will depend on the current financial position of your business and what you’re aiming to achieve in the future. If you’re looking to fund a one-off purchase, a traditional business loan could be the way to go. If you’re hoping to cover fluctuating day-to-day expenses, there might be a better option.
In all cases, the lender will consider your business credit score, annual turnover and how long you’ve been in business during the approval process. In many cases, it will display minimum eligibility criteria for all three of these factors.
Short term business loan
This type of loan arrives in one lump sum, which you’ll be expected to pay back over a set period of time with interest and fees. Loans with a term of less than two years are considered short term, while those with a term of five years are typically dubbed long term loans.
Who it’s for: Any business with a one-time expense.
How much you can typically borrow: £1,000–£500,000.
Turnaround time: As fast as the same day.
Invoice factoring
Invoice factoring is the process of selling unpaid invoices to a lender for a percentage of their value. The lender will pay this percentage to you upfront.
This option can be taken out on a monthly basis to improve cashflow, or once to cover a one-off payment. You can choose to factor in all of your business’s invoices or just a selection.
Who it’s for: Businesses that rely on accounts receivable.
How much you can typically borrow: Depends on the value of your invoices.
Turnaround time: As fast as one day.
Invoice financing
This option also gives you an advance on your invoices. Essentially, it’s a loan using your company’s invoices as collateral. You’ll get a percentage of your invoice’s value upfront, which you pay back with interest and fees. Once the creditors pay you, you repay your lender.
Who it’s for: Businesses that rely on accounts receivable.
How much you can typically borrow: Depends on the value of your invoices.
Turnaround time: As fast as one day.
Line of credit
A line of credit provides your business with ongoing instant access to a certain amount of funds, as and when you need it. Similar to a business credit card, you can withdraw whatever you need and pay interest only on what you borrow.
This option is particularly useful to assist seasonal businesses with cashflow during slow periods.
It often comes with annual fees and minimum payment obligations (either weekly or monthly), but you can typically keep your line of credit open for as long as you wish.
Who it’s for: Seasonal businesses.
How much you can typically borrow: £1,000–£10 million.
Turnaround time: As fast as one day.
Bottom line
Although medium to long term loans are a big commitment, they can be a fantastic tool to grow your business. The key is to find the best deal and spend the money intelligently.
Frequently asked questions
You’ll often need a long history of responsible borrowing and positive cashflow to be approved for a medium or long term loan. Many lenders require you to have been in business for at least 6 months before considering your loan application. However, some lenders are designed specifically for start-ups, so it’s worth exploring your options.
If you can comfortably afford the monthly repayments on a short term loan, this will be your best bet, as this will cost you less overall.
Contact any of the major credit reference agencies. In the UK, these are TransUnion, Equifax and Experian.
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Chris Lilly is Head of publishing at finder.com. He's a specialist in personal finance, from day-to-day banking to investing to borrowing, and is passionate about helping UK consumers make informed decisions about their money. In his spare time Chris likes forcing his kids to exercise more. See full bio
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Chris has written 601 Finder guides across topics including:
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