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Oct 21

Pros And Cons Of Long-Term Loans For Starting A Business

By Steve Patel | Long Term Loan

Long-term loans fall into the group of loans with the longest repayment period, which can last from three to thirty years. They are most commonly used for purchasing a car or a home. But they are also very common when starting up a business. A long-term loan is granted by an entrepreneur in order to buy the necessary equipment to start-up the business, and the business is supposed to provide the income which will partly be used to repay the debt.

When starting a business or making any sort of large purchase, it is often impossible to do so without taking a loan. When it comes to long-term loans, they may have their advantages and disadvantages, just like all other types of loans. Therefore, before applying for a long-term loan, you should carefully reconsider both sides.

Advantages

When it comes to the advantages, long-term loans usually have very low interest rates, since they are secured against assets. This means that repaying the debt will not cost you too much on the long run, even when the amount of interest is summed up. In addition, interests on loans paid on assets, which are intended for business, are tax-deductible, which further reduces the overall cost of repayment.

Then, if you want to start a small business, equity financing would require you to give up a part of ownership of the business. With long-term loans, you get to keep 100% ownership.  So this is why long-term loans are ideal for starting a personal business. When it comes to credit rating, long-term loans are ideal for raising your business’ credit rating. If you repay the installments of debt timely, the credit rating of your business will be significantly improved, and you will not have to rely on your personal credit rating when you need anything for the needs of business.

Disadvantages

In addition to the advantages, there are also some disadvantages of long-term loans. First of all, the repayment of debt can pose a problem while your business is still at the beginning. You do not only need to buy the equipment needed for the business, but there is also furnishing the offices, paychecks for the employees, and since your business still needs to be heard of – a marketing campaign should also take a lot of effort and money in the beginning.

When in addition to all that you also have the installments of debt to pay every month, it can be difficult to start a turnover and create an amount of money you can invest further or save for other business or personal needs. Another disadvantage lies in the fact that long-term loans are secured against assets. Even though it means that the interest rate will be lower, in case of impossibility to repay the debt, you may lose the assets against which your loan is secured.

Before you choose to take a long-term loan, make sure to think it through and to take all the advantages, disadvantages and possible outcomes into consideration.

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