The Top 9 Long Term Financing Strategies Companies Use to Fund Growth Plans and Capital Investments
When companies need capital to expand operations, upgrade facilities or pursue other long-term investments, they often turn to long term financing solutions that align with their growth timelines. While short term funding like lines of credit meet immediate needs, long term financing allows companies to spread repayment over 5-10 years or more. Here are 9 common examples of long term financing that provide companies with flexible capital solutions.
Issuing and Selling Corporate Bonds
One of the most prevalent long term financing examples is issuing corporate bonds, which are debt securities companies sell to investors on bond markets. The investors effectively lend money to the company for the bond’s duration, sometimes 10-30 years. Bond issuances provide large capital sums companies can use for major projects and investments while repaying over years.
Securitizing Accounts Receivables
Firms can raise capital by selling their accounts receivables or invoices to banks or specialty lenders in a financing move called factoring. The business gets upfront cash and the buyer collects payment later. By securitizing these assets, companies can monetize receivables for long term needs.
Taking Equipment and Vehicle Loans
When companies need to acquire expensive equipment like machinery, fleets, hardware or tools, they often finance these big purchases through equipment loans and vehicle loans. Lenders provide the large upfront sum and allow 2-7 year repayment periods. This matches asset lifespan.
Using Project Finance Loans
For large projects like new factories, mines, pipelines or power plants, companies often utilize project finance loans. Lenders provide construction financing based on the future cash flows of the finished project over 10-30 years. This avoids overleveraging the company.
Obtaining Small Business Administration Loans
The SBA offers several long term financing programs like 504 loans and 7(a) loans for small businesses. These provide low, fixed-rate 5-25 year loans of $50,000 to $5 million+ for major expansions, facilities and equipment. Flexible SBA terms help companies preserve capital.
Taking Advantage of Government Financing
Federal, state and municipal governments offer numerous long term financing programs to support public-interest projects by private companies. These include subsidized loans, bonds, grants and public-private partnerships lasting up to 30 years. Companies leverage government capital for public works.
Using Operating and Capital Leases
Leasing certain assets like real estate, machinery or vehicles through multi-year operating and capital leases represents a common long term financing strategy. Leases have set repayment schedules matching asset life while preserving company credit and capital.
Issuing Different Stock Varieties
Companies raise fresh equity through preferred stock or common stock offerings. Investors gain partial ownership through shares. Equity doesn’t need repayment, giving companies permanent capital for long term initiatives and stability. Stock perks like dividends entice investors.
Rolling Over Short Term Commercial Paper
Firms issue unsecured, short term corporate debt called commercial paper and continually reissue new paper when existing notes mature. This continually rolls financing. Although each note lasts under 270 days, the overall strategy services long term needs.
In summary, long term financing allows companies to align capital sources with their long horizon projects and investments. By spreading repayment over multiple years or even decades, long term loans and equity give companies more flexibility to undertake expansions and growth initiatives.
The Rising Demand for Long Term Corporate Bonds
Global issuance of long term corporate bonds has experienced rapid grown in recent years. According to data from McKinsey, the value of corporate bonds with maturities exceeding 5 years surged over 90% from 2010 to 2020, reaching $13.5 trillion. This reflects business demand for locking in multi-year financing at historically low interest rates. Major economies like the U.S., China and Japan account for most issuances, but developing nations are also seeing more long term bond activity. If rates stay low, the long term bond boom seems poised to continue.
Private Credit and Loans Take Share From Banks
Long term business loans from non-bank lenders have boomed globally as part of the private credit market. Private debt has doubled in the last decade to over $800 billion annually. Meanwhile, the share of long term credit from traditional banks has declined almost 20% in major economies. Companies see greater flexibility with private lenders. This shift demonstrates robust demand by companies for diverse long term financing partners beyond cautious banks.
Soaring Global Project Finance Volumes
Project finance loans for infrastructure, energy, transport and mining averaged over $260 billion globally in the last 3 years according to Refinitiv data. This represents growth of over 15% annually compared to the previous decade. Developing nations in Asia and Africa account for many large projects. With governments unable or unwilling to fund major public works, private companies are filling the gaps with long term project financing.
References:
https://media.wiley.com/product_data/excerpt/52/04704073/0470407352.pdf
https://www.mckinsey.com/
https://www.bloomberg.com/
https://www.refinitiv.com/
https://corporatefinanceinstitute.com/resources/knowledge/finance/long-term-financing/
https://www.investopedia.com/ask/answers/020415/what-are-some-examples-longterm-financing.asp
https://www.sba.gov/funding-programs/loans
