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4 Mistakes Businesses Make with Long Term Loans

As you’re trying to decide how to continue growing your business, you are faced with several ways you can tap into extra working capital. From long- and short-term loans to lines of credit, banks can provide you with the funding you need to reach your goals.

The best lending option for you, however, depends on your unique situation. Before applying for a loan or line or credit, think critically about the advantages and disadvantages of long term loans. Examining your needs and current financial situation carefully will allow you to identify how additional funding can support your bottom line.

Most businesses require some type of loan at some point, but the wrong decision about a loan product can seriously damage your business. Read on for expert advice on long term loans for small businesses and how to avoid the most common mistakes.

1. Taking out the wrong type of loan

There are many different types of financing available to small business owners, but each business has different needs and needs to be matched with the most effective financing strategy. Getting the wrong type of loan can have a detrimental impact on your company’s financial health, so it’s worth asking questions to understand the right financing option for your situation.

Evaluate the type of loan based not just on the amount of capital you need but also on the kind of loan that will work best for your business, how you are planning to use it, and what you’re trying to achieve.

For example, purchasing business assets (such as acquiring machinery for expansion) with a bank loan may be a better option than paying staff salaries using a bank loan. This is because you may be able to more easily dispose of the assets and repay your debt in case you fail to produce enough income to meet the payment deadline.

2. Borrowing to cover operational costs that don’t increase revenue

Cash-strapped small business owners might be tempted to borrow money to cover payroll or even their own salaries. But this is often just a Band-Aid for a deeper problem creating cash flow issues and it’s unlikely to accelerate growth.

As you’re considering taking on debt to run your business, run the “Five Why’s” test – ask yourself, ‘Why?’ five times to figure out why you’re really considering a loan and how it will help fuel your growth. Long-term loans can be an outstanding way to scale, but make sure you’re clear on why you’re taking on debt and how it will impact your growth.

3. Relying too much on short-term loans and credit lines

While short-term loans and lines of credit are often the easiest to obtain, they are also the most expensive. Constantly evaluate your credit profile to ensure your business hasn’t outgrown short-term options.

If you find that lines of credit or other short-term debt is being rolled over again and again, it may be a sign that you’re ready for a different kind of loan. Talking with your banker to help you make an informed decision.

4. Accepting a loan without understanding its cost

Just like consumer loans, business loans come with different terms and interest rates. Because small business lenders aren’t required to disclose the annual percentage rate like consumer lenders are, businesses need to be really clear on how much the loan repayment will cost in order to make sure accessing the capital is a smart decision.

Educate yourself on how different terms can impact the total amount you end up paying. The faster you need the money, the more likely you are to pay more for it. When you truly understand the costs of borrowing, you’ll have a better sense of whether the loan can help you reach your goals.

Find the right loan for you

Community banks can offer the personalized insight you need to make your decision. By collaborating with a knowledgeable strategic partner, you can move forward with your financial planning responsibly.

Crown Bank not only offers a variety of business financing options, we also offer personalized banking support and are dedicated to getting to know you and finding ways to best support you. Connect with us so we can work toward your financial goals together.