You can’t ignore the fact that sufficient financing is an important element that can break or make your business. While every business needs working capital in order to cover their regular expenses and deal with any possible crisis in cash flow, they can’t think about proper business development without long-term financial help. As per some studies, more than 45 percent of small-scale businesses fail to keep going due to inadequate funds. So, if you have long-term goals to achieve, then you will have to get long-term financing.
When Is a Long-Term Financing Required?
A business may need such type of financing to fund new expansion projects, develop new products, buy fixed assets, mergers & acquisitions, R&D, and more. The repayment period of such financing can go up to 25 to 30 years, based on the lending partner. These are best to meet a long-term financial need.
Some Advantages of Getting Long-Term Financing
The advantages offered by long-term financing compared to a short-term option are greatly related to the difference in maturities. As mentioned above, with long-term financing, you will get longer maturities. Some of the other major advantages to consider are:
- Better Stability- A long-term financing option can offer you a stable debt management option compared to a short-term loan. You will enjoy more security while budgeting your costs and expenses as the repayment period is long.
- Can Match Asset’s Duration with Labilities’ Duration- Well, the maturity related to long-term financing can be better coordinated with a general lifespan of assets brought.
- Flexibility- You can now easily find different types of long-term financing options offered by different financial institutions, like reverse mortgages, leases, loan refinancing, mortgages, and more. All these options can be easily fine-tuned based on the borrower’s requirements.
- Can Help in A Company’s Productivity- In general, long-term financings are used mainly for capital investments. Various capital investments, such as vehicles, machinery, estate, leases, and more, can offer real benefits and boost your productivity.
- Can Lower the Interest Rate Risk- Long-term financing lowers the refinancing risk which is quite common in shorter-term debt maturities as the interest rate will be fixed. As a result, it can improve your business balance sheet as well as interest rate risk.
- A Diversified Capital Portfolio- As long-term financing offer resources and flexibility to fund different capital needs, it lowers your dependency on other capital sources. You can also expand your debt maturities.
Various Sources of Long-Term Financing
- Equity Shares- Every company has a legal right to issue a certain number of shares to attract funds. Such shares have a face or nominal value. The share buyers can enjoy a dividend.
- Preference Shares- You can also get long-term financing by issuing preference shares. But the payment of dividends will be at a fixed rate.
- Bonds and Debentures- These are fixed-term, and fixed-interest investments and are generally offered by industrial and finance companies. However, these are not risk-free.
- Term Loans- Such loans are offered by state-level financial intuitions, commercial banks, investment institutions, and development financial institutions. These loans can be unsecure or secure loans.
- Sale of Assets- A business can have different types of fixed assets. They can be equipment, property, machinery, logos, and more. In some situations, it will be appropriate for you to sell some assets in order to raise funds for your new projects.
Final Words
It can be said that long-term financing is an ideal solution for both internal as well as external strategic investments, and it can also help a company in financial risk management. However, it is advisable to choose a financing option based on your business requirement after conducting a proper financial analysis. And partner with a reliable lender for better offers.