What are the sources of long-term financing?

The sources of long-term financing are those whose payment obligations exceed a period of one to five years. We will cite some instruments that can be used to raise funds for long terms.

Debt securities or bonds

One of the ways to obtain long-term financing is the issuance of debt or equity securities. bonds. They are like promissory notes that the company issues for investors to purchase in order to obtain funds from the financial market. The company issuing the securities acquires the commitment to pay an interest rate agreed upon in the issuance of such securities.

The maturity date of such bonds is also determined in the issuance. The advantage of issuing debt securities for the company is that they do not confer equity or profit participation in the organization. Other advantages of debt securities may include the following

They are low cost so they are easy to issue and improve the company's liquidity.

 They can be issued through stockbrokers and reach a large investing public.

As a disadvantage, in order to issue a company, it must be listed on the stock exchange and this requires the submission of information to the supervisory authorities on a permanent basis and in a special format.

Shares

Shares represent a form of participation in the company's equity by investors. They are one of the most viable alternatives for long-term financing.

Companies may issue preferred or common stock. Preferred stock is a middle ground between debt securities and common stock. They constitute a part of the company's capital and the holders are entitled to the company's dividends.

Preferred shareholders receive a preferential annual dividend (they are paid before ordinary shareholders), while ordinary shareholders are the ones who have the votes to elect the directors of the company, but in the event of insolvency proceedings, they are the last ones to receive the liquidation.

Advantages arising from the issuance of shares

The advantages of the issuance of shares are:

1. The company capitalizes quickly, allowing it to grow healthier.
2. This is capital that does not require any obligation to repay.

The disadvantages of issuing shares may be that they are accountable to the shareholders and that the cost of issuing shares may be more expensive than issuing bonds.

Leasing or financial leasing

It is a contract between the company and an owner of the leased property, which is established by means of a long-term lease through monthly installments. These monthly installments are part of the company's tax-deductible expenses.

Generally, the party owning the leased property is responsible for property taxes and maintenance. Although the contracts contain stipulations that both parties agree to prior to the lease.

Financial leasing has the advantage that if the asset becomes obsolete, the company is not harmed because the asset does not belong to it. Leases have a contract stipulated for a specific period of time.

For this reason, they cannot be cancelled before the time stipulated in the contract, and the company will be responsible for the total amount of the contract in the event of early cancellation.

One of the most notable disadvantages of leasing is that it is more expensive for the company than purchasing the asset in the long term.

Mortgage Loan

In this case, a property of the company is pledged as collateral for a loan. In this way, the lender uses such property to guarantee that the company will repay the long-term capital, previously agreed upon. If the company does not pay the debt incurred, the property will be transferred to the lender.

This type of long-term financing generates interest that the company will have to pay, which adds that interest to the amount it will have to repay in the long term.

For the lender it is a way to generate interest and ultimately get an asset, while for the company it is to receive a long-term capital that must be returned with the profits and be able to cancel in the stipulated time to recover the property.

Choosing the appropriate source of financing for each case is what ensures the success of the operation.