Sources of Long-Term Financing

Lesson Transcript
Instructor: Shawn Grimsley

Shawn has a masters of public administration, JD, and a BA in political science.

Long-term financing is any means to provide financial resources, such as a bank loan or leasing agreement, that has terms exceeding one year. Review the definition of long-term financing, and explore sources, including commercial loans, stock offerings, debt offerings, and government programs. Updated: 09/28/2021

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.

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  • 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
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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.

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