Michael, an owner of a food truck, took out a long-term debt in 2022 to open a new branch in central London. The loan was to be paid back in four and half years in fixed installments. Michael contacted private lenders and his bank to compare their deals. His motive was to save money on total interest payments. Since he was on good terms with his bank, he managed to get a more affordable deal than private lenders.

“Things were very smooth at the outset, Michael recalled. “I still remember I did not face any complications while paying down monthly installments, but as time passed by, I found myself being pushed into a tight spot.” Although long-term loans are suggested to be more affordable than short-term debts, my financial life is turned upside down. “I still owe money and am struggling to pay off the debt.”

5 startling truths about long-term debt

Here are the truthful facts about long-term debts that no lender would ever tell you.

• Cash flow

“That sounds good to borrow money because money will go out in small chunks over a period of time,” says Michael. “But we often see that benefit against the outright payment,” Michael said that his cash flow was disrupted soon after he had made a couple of monthly payments.

A greater portion of the money continued to go out every month, and his junk food did not pick up much demand on the streets of central London. He even struggled to have enough money to meet day-to-day operations such as the procurement of pizza bases and burgers. He also had difficulty paying his staff wages on time.

The size of the monthly installment can be quite big. It is likely that your sales are not enough to align with your expenses. Debt payments are a type of fixed expense. You cannot lower them just because your business is not able to produce enough profits.

Tips:

• At the time of borrowing money, you should check if your cash flow will remain healthy.
• What is plan B in case the sales drop or your business does not attract enough clients?
• Do not decide the suitability of a long-term debt simply only on the basis of the size of monthly instalments.

Cash flow is an important part that ensures the smooth running of a business. Disrupted cash flows can make it impossible to keep up with debt payments. You will likely fall into debt.

• Stifling growth

Entrepreneurs take out long-term debts to invest in propitious projects in the hope that their businesses will grow. Unfortunately, the reality turned out to be the reverse of their expectations. When Michael borrowed from direct loan lenders in the UK, he thought he would start making profits within the first six months.

“To grow, your company needs earnings to invest in research and product development,” said Michael. “You will have to invest in advanced equipment and marketing to reach out to new customers. Since you’re a large portion of your earnings keep going towards the debt payment, your business starts to wobble.

Long-term debt is an additional expense that puts weight on the company’s budget. Your company must be able to cover this extra cost through revenues. Your debt becomes a nightmare since your company fails to invest in ways to grow your customer base.

• The loss of collateral

Mostly, long-term debts are subject to collateral. It will lower the risk of a lender involved in lending you money as they can seize your property. The collateral will be your business assets if you borrow money for the growth of your business. It will be your personal property if you borrowed money for a non-business purpose.

In the event of a payment default, you will lose your collateral. Michael talked to his bank when it was becoming difficult to pay off the debt. His bank revised his payment plan. “It is always suggested to talk to your bank seeking some support when you are struggling with payments,” said Michael. “It is better than falling behind on payments.”

• The overall cost will be very high

Long-term debts are not as affordable as short-term debt. They are subject to additional formalities: for instance, you will have to arrange collateral worth more than the actual cost of your debt. Since payments will be made over a period of time, interest will keep accruing on the unpaid balance. As a result of that, you will end up paying more money as interest in total. The following table demonstrates how the interest amount increases as the repayment term is extended.

Loan amount	£10,000	£10,000
Repayment term	2 years	5 years
Monthly payments	£442.92	£193.03
Total amount payable	£10,630.08	£11,581.80
APR	6.1%	6.1%

The aforementioned table clearly shows that you would end up paying more interest when you borrow the same amount at the same APR for a longer period. “I believe that entrepreneurs should carefully weigh up the total cost of the debt,” said Michael. “Otherwise, their businesses could be badly affected.”

Long-term debt is often expensive because of other factors as well. For instance:

• How much money you already borrow
• Are you an existing customer of a bank or lender?

Despite a good credit rating, you will struggle to get money at lower APRs if you already owe some money. If you have outstanding debts, you should take out debt consolidation loans for bad credit in the UK with no guarantor from a direct lender. Having cleared your outstanding debts first will help you borrow money at lower interest rates.

• Your business becomes more vulnerable

Long-term debts can leave your business vulnerable, not that you are just at risk of losing your secured business asset. Your sales can unexpectedly decline, or you may fail to grow your customer base. You will suffer to meet your business expenses. You will incur late payment fees and interest penalties if you miss payments. Your debt will quickly add up, and eventually, you will end up using your business assets to clear your debts.

The bottom line

Long-term debts are expensive even though they are subject to collateral. You will have to pay more money as interest because of accrued interest over unpaid sum. You will likely face cash flow problems. It can be hard to meet day-to-day business operations.

Your growth will be stagnant. Unexpected changes in the economy can make you even more vulnerable. It is always suggested weighing up the implications of long-term debts on your finances before using them. Take economic factors into account as well.