Last updated on November 27th, 2017 at 10:58 pm -
A long-term loan is a form of debt financing that lasts beyond a year. This is a loan or capital lease used to facilitate the business activities and has a repayment period beyond 12 months. Long-term debt financing is both financial and current liabilities. A financial liability because business owners have to repay lenders these funds. Additionally, a long-term debt is a current liability because of its monthly repayments. These payments go to servicing note payables: principal and the interest. At LenCred, we advise on having an updated company balance sheet that will help in tracking a small business’ loans and profitability.
Types of Long-Term Debts
To know your long-term debts in a financial statement, subtract your current liabilities from your total liabilities. Long-term debts can be of different forms. A business can raise funds through leases, loans, debentures, government debt (like SBA loans) and deferred payment.
Long-Term Debt Financing: Leases
Leases are a good source of long-term debt financing for small businesses. A lease term is a contractual agreement between the owner and the user of an asset. The user or lessee is expected to make regular payments for using an asset to the owner or lessor. These payments can be monthly or yearly. Under this contract, ownership rights remain with the lessor of the asset. On the other hand, the lessee gets the right to use the said asset for their business activities.
In addition, the lessee is tied by other contractual clauses in the lease agreement. Essentially, ownership rights give lessors the liberty to set usage clauses. These clauses control the manner and form of usage that will be adopted by the lessee. The common leased assets include land, building or office space through tenancy. Alternatively, one can seek equipment lease. Equipment on lease include manufacturing machinery, software, computers and other IT equipment. Leasing is cheaper. This means, by simply renting, small businesses get to use assets whose buying would be unsustainable. The user can derive utility from these assets by renewing the possessory rights of the asset, giving them flexibility.
Long-Term Debt Financing Online: Loans
This is a long-term debt financing received from a financial institution, individual or fellow company to facilitate your small business’ needs. Unlike equity financing, where business owners have to shed off shareholder equity ratio, loans guarantee your business ownership. Long-term loans have a repayment period that exceeds a year. These funds can be used to cover various needs. Unlike the traditional bank loans, nowadays, it is easier to find long-term debt financing online. These loans include:
- Equipment loans to facilitate purchase of machinery and other business assets.
- Constructions loans that provide liquid capital to embark on major construction projects in buildings or undertake renovations.
- SBA loans that cater for different types of entrepreneurial SMEs.
- Business line of credit to meet a loss contingency that may arise through your business activities.
- On the other hand, invoice financing loans can also mitigate the challenges resulting from late payments, hence ensuring uninterrupted business activities.
This is a loan agreement between a supplier and a buyer on the sale of goods. The buyer is expected, under the agreement, to commence payment of these goods in the future at an agreed upon time. Deferred payment is hard to access especially in small businesses. This is because this mode of long-term financing is dependent on a business owner’s relationship with the supplier.
How to Get Long-Term Debt Financing Online
A long-term debt is essential to small business start-ups. This is because the loan facilitates their quick maturity. Long-term debts facilitate these enterprises in paying immediate expenses like insurance, licensing, business research and sales promotion. By providing funds to service these expenses, these debts buy time for a start-up to be self-sustaining. Therefore, securing a long-term debt for a small business is quite imperative.
Leases are suitable for small businesses because of their off-balance-sheet financing. Getting a lease can be quite easy and less stringent compared to other types of long-term debt financing. There are many lessors that one can choose from. Long-term debt financing online sources that lease out assets are on the rise. To get one, do a credit research within your locality. Make a formal application. Review and ascertain that the contractual agreement suits your needs. This is key to ensuring it does not limit you. If it is also affordable through a reasonable estimate, take it up and make renewals through regular payments.
Deferred payments are gained over time. Supplier financing is determined by extensive trading and having a closer relationship with you suppliers. On the other hand, for an established small business, it may receive deferred payments. This case is dependent on the type of supplier. To know which companies offer deferred payments, undertake a long-term debt financing online credit research. Get to know these institutions, their interest levels and their grace periods before making payments.
Loans can be easily accessed through a credible lender or financial institution. As a business owner, you can also seek long-term debt financing online. Online sources are cheaper due to their competitiveness through the many products floated from different companies. They are also less stringent in their application processes. However, some may require proof of business, age of the business and strict adherence in spending.
A company can float a debenture to invest in a variety of business activities. Debentures offer interest rates flexibility and sufficient access to resources for the borrower. This makes them one of the best long-term debt financing online sources. These are non-collateral documents issued to lenders for money advanced. Debentures like bonds have bond premiums and bond interest expense. They are offered at discounted rates with the face value being paid on maturity. Using debentures as a source of financing has been limited to huge corporations, which have dependable creditworthiness.
Where to Invest Long-Term Debt Financing
Leases can be used as an alternative to purchasing an asset. This form of long-term financing is affordable to a business start-up. This is because start-ups only have to make regular payments for using a particular asset rather than dig deep to buy it upfront. As a business owner, lease an equipment or an essential fixed asset whose full purchase can be tasking to your small business.
Long-term loans can be used for a number of purposes. Long-term loans have flexible and affordable installments. This is ideal for investment unlike short-term loans that can be pricey. These loans can be used to offset current liabilities, scale up your production and other activities, or improve technology.
Deferred payments are essential for capital goods. Getting deferred payment on these goods will give enough time for the commodity to start generating income. These revenues can be used to pay up its debts in future. For instance, getting deferred payments on inputs like eggs in bakery will favor your business. Revenue made through the sale of cakes will pay up the supplied eggs’ debts.