Login
Copyright

Sources of Long-Term Financing

An error occurred trying to load this video.

Try refreshing the page, or contact customer support.

Coming up next: The Financial Planning Process

You're on a roll. Keep up the good work!

Take Quiz Watch Next Lesson
 Replay
Your next lesson will play in 10 seconds
  • 0:06 Long-Term Financing Defined
  • 0:59 Commercial Loans
  • 1:40 Stock Offering
  • 2:30 Debt Offering
  • 3:03 Government Grants
  • 3:38 Lesson Summary
Add to Add to Add to

Want to watch this again later?

Log in or sign up to add this lesson to a Custom Course.

Login or Sign up

Timeline
Autoplay
Autoplay
Create an account to start this course today
Try it free for 5 days!
Create An Account

Recommended Lessons and Courses for You

Lesson Transcript
Instructor: Shawn Grimsley
Some businesses require a large amount of capital to get off the ground or expand. In this lesson, you'll learn about sources of long-term financing, including commercial loans, selling equity and issuing debt.

Long-Term Financing Defined

Meet Bill. He's a motorcycle enthusiast who made his passion into a business by building custom motorcycles, or choppers. He's been highly successful in the local market, a major city on the West Coast, but wants to take his business to a national level with large productions of motorcycles he's designed. However, he needs a lot of money for the expansion, and he doesn't have nearly enough.

He needs to buy land, equipment and a large factory. He'll also need a great amount of inventory and enough cash to keep the lights on and employees paid until sales revenue picks up. In fact, he anticipates it will take several years of operations before he will recover the initial costs of the expansion.

Consequently, he needs to seek long-term financing, which is the use of credit from an external source with a maturity date longer than one year. In other words, he needs access to money that he won't have to pay back for over a year.

Commercial Loans

Bill can try and get a commercial loan. A commercial loan is a bank loan where Bill or his company executes a promissory note, which is an unconditional promise to pay, and agrees to pay the bank the principal amount of the loan in addition to an amount of interest for use of the money. Commercial loans may be secured or unsecured loans.

A secured loan means that Bill has pledged collateral that the bank can take and sell to satisfy Bill's loan obligation if he defaults. An unsecured loan is a loan where the bank is not protected with collateral. It's not always easy to obtain a commercial loan, as banks are very cautious about lending money to smaller businesses without a significant track record and assets.

Stock Offering

Bill can also offer stock to help raise funds for his new expansion. Stock is an ownership interest in a corporation. For example, let's say Bill needs three million dollars to make it through the first two years of expansion before he thinks sales revenue will be sufficient to start covering operating expenses. If he can find investors interested in his company, he can offer them shares of his company in exchange for cash.

Of course, this means Bill is no longer the only owner of his company. In fact, he may lose control of his company if he doesn't maintain control of a majority of the stock. He'll also be under pressure from his shareholders to perform because they expect a return on their investment in the form of dividends, which are distributions of corporate profits. Since a stock is a security, an offering of stock is regulated by the SEC and state securities agencies.

Debt Offering

There's more than one way to finance a business through debt. Rather than going to a bank, Bill can go to individual investors. Bill can offer debentures, which are debt instruments, such as corporate bonds, to investors. Instead of getting a loan from a commercial bank, Bill, in essence, is getting a loan from several different investors. While these investors will not own part of his company, they are creditors and will expect prompt payment. Like a stock offering, offering debentures is regulated by the SEC and state securities agencies.

To unlock this lesson you must be a Study.com Member.
Create your account

Register for a free trial

Are you a student or a teacher?
I am a teacher
What is your educational goal?
 Back

Unlock Your Education

See for yourself why 30 million people use Study.com

Become a Study.com member and start learning now.
Become a Member  Back

Earning College Credit

Did you know… We have over 95 college courses that prepare you to earn credit by exam that is accepted by over 2,000 colleges and universities. You can test out of the first two years of college and save thousands off your degree. Anyone can earn credit-by-exam regardless of age or education level.

To learn more, visit our Earning Credit Page

Transferring credit to the school of your choice

Not sure what college you want to attend yet? Study.com has thousands of articles about every imaginable degree, area of study and career path that can help you find the school that's right for you.

Create an account to start this course today
Try it free for 5 days!
Create An Account
Support