Long-term loans are designed to finance an investment or business plan over a multi-year time horizon.
They must be focused on profitable projects in order to be able to pay back the money with solvency. Otherwise, the credit will be a burden for several years.
The cost of financing is the first thing to consider in any loan. From the costs of formalizing the contract to the payment of the installments, which will knock on the door punctually every month.
When considering an operation of this type:
- The objective of the loan and the expected return on capital must be well evaluated.
- It is essential to plan and control well each payment over the years because the costs must be borne from day one.
What you should not do is apply for a loan to correct cash flow imbalances. It would be like covering a hole with another one.
To cover the lack of liquidity there are other better solutions. we help freelancers and SMEs to advance the collection of their invoices through the new collective financing models: crowdfactoring.
What are long term loans?
A loan is a financing operation in which one party lends an amount of money to another party. The borrower is obligated to repay the money received plus interest according to the agreed upon repayment schedule.
What are long term loans for businesses?
Long-term loans are part of a company’s liabilities. They are included in the section of the debt (long-term liabilities).
They are a source of external financing that must be repaid and remunerated, with an explicit cost: interest, commissions and other expenses (registration, notary, taxes, etc.)
The long-term condition means that the return of the capital and interest is made over several years in the form of periodic instalments.
Installments are calculated based on the capital loaned, the interest rate and the repayment term/duration of the loan. The usual method of calculation is the “French system”:
The installments are equal throughout the period but the first payments include a higher percentage of interest and the last payments include a higher percentage of principal. That is, interest is amortized in a decreasing manner and capital is amortized in an increasing manner.
This fact is very relevant at the accounting and tax level. The part that corresponds to the amortization of the capital -the outstanding debt- is not the same as the part that implies financial cost (interest or commissions).
Even if the loan is justified, the requested capital may take some time to yield a profit. It is crucial to have short-term liquidity to face that first phase.
Disadvantages of long-term loans
Each organization must evaluate its objectives well and make appropriate decisions. In this case, it is a matter of analyzing the advantages and disadvantages of long-term loans and their role in the company.
In this financing formula it is very complicated to find loans without collateral. The longer term increases the risk of insolvency and also the demands of financial institutions.
The advantage they have is to be able to finance larger projects with more comfortable instalments. It is also possible to renegotiate the debt at some point.
Among the disadvantages some are important. If there is not a certain initial solvency they can be unviable and dangerous.
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