As your business grows, you may consider expanding your operations or acquiring other companies. Since these options require a large investment, you may need to find long-term sources of finance. Credit and bank loans, venture capital, equity financing and debentures are just a few examples.
Long-term financing appeals to companies that are planning to expand their operations, acquire new technology or create new products
Long-term financing options appeal to companies that need a lot of money to make an investment and have exhausted their internal sources of finance. Each has its benefits and drawbacks.
What Is Long-Term Finance?
Whether you want to enter new markets, develop new products or buy new equipment, long-term financing may be a viable option. This type of funding can be obtained for a time frame exceeding one year – usually, five-to-10 years.
Let's say you're running a beauty store. At some point, you create your own product line. Your business grows and your small store can no longer keep up with the demand, so you decide to expand your operations. This may involve opening a second store, a manufacturing facility or smaller shops across the state. It also requires hiring new people, paying more in rent and purchasing new equipment.
Since you need a lot of money for expansion, you start searching for sources of long-term loans. This will allow you to grow your business without getting into debt. Short-term financing, by comparison, would force you to pay everything back within a year.
What Long-Term Financing Options Are There?
Depending on your business type and size, there are various long-term sources of finance available. These include:
- Equity shares
- Preference shares
- Venture funding
- Term loans
- Bonds and debentures
- Retained earnings
- Deferred credit
Term loans, for instance, can be provided by the government, banks or lending institutions. The borrower must repay the loan in specified installments, which cover both principal and interest, over a period of five-to-10 years. In general, these loans cover at least half of the total capital.
These types of long-term financing are ideal for projects that require heavy investment, such as importing or buying equipment. The loan agreement may include certain conditions for borrowers, which are usually related to cash flow, use of assets and more.
Companies can also secure funding by issuing bonds. At the most basic level, bonds are debt obligations that allow you to receive a loan. For lenders, these are a type of fixed-income investment. Think of it as a loan between your company and an investor that gives you a specific amount of money in exchange for interest payments.
Long-term sources of finance also include venture capital. This type of funding is usually provided by investors to small companies with a long-term growth potential. If you're just starting a business, you can invest venture capital of your own. However, it may not be enough to cover your expenses in the long run. The downside is that all the money may be lost if your business fails.
Companies looking to expand their operations or invest in new equipment can also opt for equity financing. This allows them to raise capital by selling shares. The process is regulated by local or national securities authorities. Their role is to protect the investors from business owners who may disappear with their money.
Each share represents a unit of ownership of your company. The more shares you issue, the smaller your ownership is in the organization and the less control you have. Equity is decreased by losses and withdrawals. Every time you make investments, it increases.
Equity is one of the most popular long-term sources of finance because it doesn’t need to be paid back. Additionally, the investment can be made by your family or friends as well as by wealthy individuals who may decide not to get involved in the management of your business. Venture capitalists, on the other hand, will take an active role within your company so they can maximize their return on investment.
Compare the different long-term financing options before making a decision. Consult a financial advisor if necessary.