Is a Long Term Business Loan Your Path to Growth or a Risky Bet? Let’s Find Out!
A long term business loan is a financing option with a repayment period of three to five years, typically used for working capital, major equipment purchases, or debt restructuring & even expansion.
Points to Ponder before taking Long Term Business Loan
- Ample Funding: Long term business loans are ideal for substantial capital needs, enabling major business moves.
Example: A company might use a long term business loan to buy new machinery, boosting production capacity to meet demand and enter new markets. - Reduced Payments: Extending the loan term tenure lowers monthly payments and can help to manage cash flow.
Example: A small retail business might secure a 5-year business loan for store renovations, allowing them to spread costs and ease payments while keeping operations steady. - Total Cost: Consider the full loan cost, including fees, despite lower interest rates.
Example: A business may find a low-interest long term loan appealing, but additional fees and cumulative interest can significantly impact their budget. - Impact on Debt Ratio: The debt-to-equity ratio is a common metric used by financial institutions to assess a company and its creditworthiness. When a business gets excess debt without adding equity capital, it creates concern for the existing and prospective lenders.
Example: A company with a debt-to-equity ratio of more than 2 generally indicates high leverage. In that case, the fixed obligations of the company increase and thus increases the risk for lenders. - Sustained Cash Flow: Cash flow is an important metric when it comes to fixed EMI obligations. In case of long term loans, the repayments should align with the business model to ensure timely payments.
Example: A restaurant chain expanding must ensure steady cash flow to cover long term loan repayments, even during seasonal or economic slowdowns. - Flexible Terms: Every business has its own model and hence have different funding requirements. It is wise to look for loans with options like grace periods or variable rates specially if your business has seasonality issues.
Example: Businesses in the agriculture sector face issues during off season. Such a business can look for loans with a moratorium period where they may not pay principal obligations during that time. Apart from that, variable interest rates is also a viable option for such a business. - Collateral Risk: For secured business loans, collateral is required from the lenders. A high collateral value can help your business get better terms but there are substantial risks also involved with the same.
Example: A manufacturing business might use its warehouse as collateral for a working capital loan. A construction business can use its saleable flats for last mile financing. - Approval Process: It is imperative for a business to understand the approval process of their lenders. A quick loan process can help your business to grow faster and not miss any opportunities due to lack in funding.
- Financial Check: A lender looks at various financial metrics before giving out loans. But it is also important for the business to do their own analysis before going to the lender. Understanding how a long term business loan can affect your business metrics can help you plan better.
Example: A business looking for loan for expansion should have a strong grip on how the debt might affect its overall costing. - Clear Purpose: Use the loan for long term investments like expansion or upgrades.
Example: A company planning a loan for expansion should review financials to ensure strong sales, controlled expenses, and a solid cash reserve. - Explore Options: Consider alternative financing like each with distinct pros and cons.
Example: If a business has already taken secured loans and does not have any asset to offer as collateral, they can look for facilities like invoice discounting to meet their working capital needs. - Future Fit: Align the loan with your long term business strategy and future landscape.
Example: A green energy company must ensure a loan for solar expansion aligns with industry trends, regulations, and market demand for sustainable growth. - Consult an Expert: Seek advice from industry experts to get tailored guidance on your loan decision.
Example: A company might collaborate with a financial institution like Red Fort Capital to assess the impact of a long term business loan on their succession plan, ensuring it benefits both the current and future generations.
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Wrapping It Up - Long Term Business Loan In India
Choosing a long term business loan goes beyond quick cash—it’s about aligning with your goals and managing debt wisely. Lower payments and abundant capital are attractive but consider them carefully against long term commitments and risks.
The right loan can boost your business, while the wrong one may impede growth. Make this decision with clear goals and strategic foresight.
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About Red Fort Capital
Red Fort Capital is dedicated to empowering Indian MSMEs (Micro, Small, and Medium Enterprises) on their path to business growth through customized business loans. We understand that securing a business loan in India can pose significant challenges, particularly when factors like a less-than-ideal credit score, a relatively short business history, unclear financial records, or variable cash flow come into play.
As a respected Non-Banking Financial Company (NBFC), we take pride in offering a diverse range of secured business loans, spanning from 1 to 10 Crores. What sets us apart is our remarkable ability to disburse funds fast, in just 7 days. Our financial solutions are meticulously designed to cater to a spectrum of needs, including working capital requirements, equipment and machinery purchases, invoice/bill discounting, and last-mile financing, among others.
