Limitations of Long-Term Financing

Apart from the benefits, long-term financing has certain limitations which are as follows,

1. Higher Interest rates: Due to its longer repayment period, there is a risk associated with the lenders. Although there is a steady flow of income for an extended period, there is an increased risk for the same long period. Thus, the lenders offer higher interest rates to cover the increased risk. This process also helps lenders protect them from inflation risk, as when they receive their amount back, the value of the amount won’t remain the same as it was at the time of lending.

2. Risk of Losing Collateral: While availing the long-term finance, the borrower puts up their asset as collateral. Hence, if the borrower is unable to repay the loan, there is a high chance of losing the collateral. As for the lender, as the amount of the funds is high and the repayment period is long, to combat the risk collateral is required by the lender. Therefore, being a borrower they face the risk of losing their collateral until the debt is completely paid off.

3. Stricter Terms and Conditions: Another disadvantage of availing of long-term financing is that it demands too much crucial information about the borrower. Similar to personal loans, business loans offered by financial institutions or corporations look back into the financial history and from profitability to the history of repaying loans. Lenders look for reliable borrowers as long-term financing involves huge sums of money and longer repayment periods. Hence, if any borrower has no credit score, availing of this form of financing would be a bit difficult.

4. Maintaining Longer Duration Repayment Period: The repayment period is so long that this might impact the credit score and make the cash flow negative until a strong debt repayment strategy is built. Long-term loans require monthly repayments for a long duration on a consistent basis and if one fails to be regular in repaying, then it would impact their credit score. later on, this would create a hard time in availing another loan in the future.