Longer-Term Commercial Loans
Commercial banks generally do not want to issue long-term loans (loans with terms longer that 1-3 years) to small/new businesses. Banks are correct in assuming that the longer the life of the loan, the greater the risk to the lender because of the higher chance for default. The banks belief is that the small/new business might not be around in ten years. If this happens, the banks will only get a portion, if any, of their money back. Therefore, banks require extensive collateral and regularly limit the length of these loans to at most seven years. Just like any loan, an exception for a longer term may be negotiated if the borrower has good credit or substantial collateral. A Long-term commercial loan has the following components:
- A fixed amount of money that is borrowed.
- A set amount of time.
- Interest is paid on the lump sum.
The reason a business would want a longer loan is typically for the purchases of major equipment, plant facilities, a business expansion, or other acquisition costs. The asset being acquired usually helps secure the loan. A standard loan agreement is commonly required.
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