The Advantages of Long-Term Debt Financing
Generating money to start a new venture or to expand an existing business can be a challenge for small businesses. Long-term debt financing provides them with access to cash for growth in exchange for periodic installments. How much cash is available to a business will depend on several factors, such as the business' credit history and its debt to equity ratio.
Long-term financing provides businesses and individuals with a more stable debt management instrument than a short-term loan. Unlike certain short-term loans--such as credit from a supplier--which may be recalled at short notice due to lack a formal agreement, long-term loans are detailed in formal contracts, and the installments are either at a fixed rate or at a variable rate determined by the market. Long-term financing allows borrowers to have more security when budgeting for costs and expenses.
There are a wide variety of long-term debt financing options available to borrowers, such as mortgages, leases, reverse mortgages, and loan refinancing, which can be fine-tuned to meet the borrower's needs. This allows more flexibility and control over spending. For instance, a lease is a special type of long-term debt-financing instrument that allows you to benefit from the use of an asset in exchange for rental payments without having to purchase the asset. This is particularly useful when dealing with assets that have a predictable lifespan and that are closely linked to a company's productivity, such as machinery and vehicles.
In contrast to short-term loans, such as credit from a supplier, which changes over time and requires regular monitoring, long-term financing is regular and structured. Although long-term debt instruments require you to provide extensive information to the lenders, once they are secured they require minimal maintenance. This reduces the work hours required to maintain the loan.
Unlike short-term loans, which are used as a quick source of cash to tide over short-term liquidity problems, long-term debt financing is used for capital investments. Capital investments, such a real estate, machinery, vehicles, furniture and leases, provide real benefits to a company by either increasing its productivity or expanding its operating capacity. For example, a successful restaurant can use a mortgage -- a classic example of long-term debt financing -- to open a new location and increase its profit potential.