16.4 Raising Long-Term Financing

Companies need money to grow, and they've got two main options: borrowing or selling ownership. Borrowing means regular payments but keeps control. Selling ownership shares profits but dilutes control. Each has its pros and cons.

Long-term financing comes in different flavors. There's term loans from banks, bonds that companies issue, and mortgages for real estate. The choice depends on the company's needs, financial health, and future plans.

Long-Term Financing Options

Debt vs Equity Financing

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• Debt financing involves borrowing money from lenders (banks, bondholders) and requires regular payments of interest and principal, does not dilute ownership or control, and interest payments are tax-deductible
• Equity financing involves selling ownership stakes to investors, does not require regular payments but may involve sharing profits through dividends, dilutes ownership and control, and dividends are not tax-deductible

Long-Term Debt Types

• Term loans provided by banks or financial institutions with fixed repayment schedules over specified periods, may require collateral (real estate) or personal guarantees
• Bonds are debt securities issued by companies or governments with fixed interest payments (coupon rate) and maturity dates, can be traded on secondary markets, and include corporate bonds, government bonds (Treasury bonds), and municipal bonds
• Mortgage loans used to finance real estate purchases, secured by the property, have long repayment periods (15-30 years), and can have fixed or adjustable interest rates

Debt vs Equity Advantages and Drawbacks

• Debt financing advantages: maintains ownership and control, interest payments are tax-deductible, lower overall cost of capital compared to equity, and predictable cash outflows for budgeting
• Debt financing drawbacks: requires regular payments that can strain cash flow, increases financial risk and default possibility, may require collateral or personal guarantees, and restrictive covenants may limit operational flexibility
• Equity financing advantages: no regular payments required, reduces financial risk and default possibility, provides additional growth and expansion capital, and investors may offer valuable expertise and networks
• Equity financing drawbacks: dilutes ownership and control, requires sharing profits with investors through dividends, higher overall cost of capital compared to debt, and may involve complex negotiations and legal agreements