Most conventional loans are for a maximum of 5 years, but if you want to take a long-term loan, you must discuss it with the lender before signing the credit agreement. Typically, long-term borrowers invest money in business development or invest it in large companies.
With which investors you can get a long-term loan
It is possible to get a long-term loan at any bank, but not all financial companies are happy to apply for it, because such loans are not very profitable for the bank. Investment banks, pension funds, insurance companies most often provide long-term credit. If you are a business owner and have decided that you need to take out a long-term loan with your bank as a matter of urgency, you will be assisted by accounting records that can document all cash movements. In order to obtain long-term credit, the company will need to select the most important documents and key documents that will prove the company’s success. Depending on the purposes for which you need the money, it is your responsibility to provide the following documents for your business:
- construction contracts;
- project estimates;
- mode of innovative technical equipment;
- business plan for business expansion.
All of the above documents must state the purpose for which the loan from the bank will be spent. In situations where the bank issues a loan for a shorter period (less than 5 years), the company only provides accounting data. It is precisely these that track the amounts spent on staff salaries, purchases of materials and supplies and the purchase of new equipment.
The Bank will control the movement of long-term credit
After receiving a long-term loan from the bank, the accounting will reflect the deferral of the loan payment in the event of an extension of the contract. In a difficult financial situation, a company has the right to transform a regular bank loan into a long-term one through re-crediting. Often, it even offers significant savings when a bank offers a loan with a reduced refinancing rate. In order for the bank to keep track of its cash and business expenses, all costs must be recorded in the company ‘s books and must be submitted in due time to the creditor in the form of a supporting document.
Provision of long-term credit
Whatever the purpose you decide to take a long-term loan, it definitely needs to be a target loan, that is, all credit will be spent on a specific purpose only. Likewise, when issuing a loan, the bank will definitely require collateral. That may be exactly why you are borrowing money: equipment, machinery, real estate, assets, securities, commodities, etc. When issuing a long-term loan for such a long period of time, the bank must secure and obtain a guarantee in the event of bankruptcy or will become insolvent so that the creditor can recover his money anyway.
The maximum amount of a bank loan directly depends on the level of the company’s income and its ability to repay the principal and interest rate of the loan itself. Therefore, the creditor calculates the ratio between the borrower’s debt, its personal resources and the market value of the property. Often the bank applies a ratio of 30/70 , which means that in order to obtain long-term credit, the company itself has to contribute 30% of the value of the intended project. Of course, without a business plan, getting a loan from a bank is impossible. In the case of lending to legal persons, other companies or natural persons may be considered as additional security. But in general, it will not be possible to influence early access to credit in this way.
Application of long-term loans to individuals
An ordinary lender, that is, a natural person, can obtain a mortgage, purchase a car or pay tuition fees on a long-term loan. In the latter case, the bank credit is extinguished after the diploma is received, but only the annual interest is paid for the entire period of study. This type of long-term credit allows students to study without worry, with a full focus on learning without looking for additional sources of profit. On average, such a bank loan can have a repayment period of up to 10 years. If you decide to get a long-term loan to apply for a mortgage, you have 30 years in reserve to pay off that loan in full. Just remember, the longer the repayment period, the more money you will have to pay in the form of an interest rate.
Differentiated payments are the optimal choice for such long-term lending. Undoubtedly, at the beginning, every payment will seem like a heavy burden on your family budget, but it will become easier and easier to repay your bank loan later. As a result, the overpayment will be minimal. If you decide to take a long-term loan for investment purposes to grow your business, only accounting will help you keep track of your invested movements. This will allow you and your creditor to see the cost of wages, the cost of purchasing raw materials, and the overall picture of income and expenses .
In life, we rarely live without bank loans, but before you apply for or receive them, you need to really consider your options and the prospects of your business before you can complete the transaction. Credit, especially long-term, is far from being a simple procedure and is a relatively responsible step. Don’t forget to meet one small condition: calculate the amount of your long-term loan overpayment and think about whether it’s worth taking at all? Companies that decide to use long-term credit are required to anticipate all possible development scenarios after receiving the loan money. Also, the possibility of early repayment of the loan by free funds should be considered. But the key to a successful and fast repayment of a long-term loan is the provision of sufficient reserves in liquid assets.
Long-term credit as a backup option
We have already covered the main types of long-term credit, but have not looked at another form of this loan – the borrower is in urgent need of refinancing. Typically, such unexpected situations occur suddenly: the borrower is ill, has lost his job, is downgraded or has a reduced rate. As a result, solvency has fallen dramatically and the customer cannot repay earlier monthly payments. In this case, the bank offers to apply for and receive a long-term loan in the form of refinancing. This means that your debt will be extinguished, but over a longer period . With this method, you will be able to pay lower monthly payments, which will not burden your already small budget.