Longer-Term Commercial Loans

April 13, 2006

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Long-term commercial loans (those repaid over more than one to three years) are typically more difficult to obtain for smaller businesses because the longer the term of the loan, the greater the risk to the lender. With small businesses, a lender may not be willing to assume the risk that the business will be solvent for, say, 10 years; consequently, banks will require collateral and limit the term of these loans to about five to seven years. Occasionally, exceptions for a longer term may be negotiated. Also, loans secured by real estate can carry an extended term.

The purposes for longer commercial loans vary greatly, from purchases of major equipment and plant facilities to business expansion or acquisition costs. These loans are usually secured by the asset being acquired and financial loan covenants are regularly required.

Work Smart

Some small business advisors discourage the use of debt financing for fixed assets, particularly long-term assets such as equipment, office space, or fixtures. They suggest that the cash-flow problems of small businesses require that borrowed money be directed to generating immediate revenue through expenditures relating to inventory and marketing. Buying a new expensive piece of machinery may take many years to pay for itself. Instead, you should aim to obtain a high rate of short-term return on every cash investment, and do whatever you can to minimize the costs of fixed assets by leasing, buying used equipment, sharing equipment, etc.