There are a few sources companies can go to for long-term financing, and they have notable differences.
Long-term financing typically serves as a complement to existing short-term bank financing, rather than replacing it. Long-term financing providers offer more strategic capital that supports lasting business growth and financial risk management.
There are 2 Primary Types of Long-Term Financing Providers
Public and private companies typically obtain long-term financing through one of these two capital providers:
- Private Placement Investors — A ‘private placement’ is a private alternative to issuing (or selling) a publicly offered security as a means for raising long-term capital. In a private placement, both the offering and sale of debt or equity securities are made between a business (or issuer) and a select number of accredited investors (or lenders). There may be as few as one investor for any issue. Private placement investors are typically institutional investors, such as large insurance companies. A private placement issuance is a way for institutional investors to lend to companies in a similar fashion as banks, with a ‘buy-and-hold’ approach, but longer term and typically fixed rate, like public bonds. Unlike public bonds, private placements have no required trading or public disclosures.
- Public Bond Buyers — Companies will often issue a corporate bond in the public debt market to raise long-term capital. It typically takes longer for a company to receive capital through bonds due to the time and resources required to create the necessary prospectus and register with the Securities and Exchange Commission (SEC). With bond issuances, ratings and minimum issuance size are typically required, as well. Like private placements, public bond buyers also include institutional investors. Amounts raised in public bonds are usually larger than private placements, and the debt is more likely to be traded than with private placements.
Private Placements vs. Public Bonds
There are various pros and cons to sourcing long-term financing through private placements as well as public bonds:
Private placements and public bonds have different advantages and disadvantages. Public bonds have no financial covenants, however issuing a first-time private placement tends to be a simpler process, has minimal fees and no SEC registration or rating requirement. Additionally, public bonds have a much higher minimum issuance size ($300 million+) making it less relevant for many companies with lower funding needs.
With either provider, long-term financing is patient capital, offering longer maturities for companies seeking to invest in capital assets, projects or acquisitions that have a longer investment return runway or are seeking liquidity to buy out a shareholder. For public bonds, however, because there are many investors, and the investors often change as the bonds are traded, it is difficult to make any changes to terms after the initial funding.
What to Look for in a Long-Term Financing Provider
There are important considerations for a company when selecting their long-term financing provider, some key characteristics to look for are:
- They are fast-acting, responsive and have access to key decision-makers within their organization.
- The long-term financing provider demonstrates a constant appetite for debt throughout market cycles, the calendar year, and stages companies may go through.
- They follow through on their commitments.
- They are relationship-oriented rather than transaction-oriented or fee driven. It is important that the long-term financing provider works to understand the needs of the companies they finance as well as how the companies function.
- Because the financing is long-term, it is vital for the long-term financing provider to have a strong relationship with senior management, to act as a sounding board if necessary and have the knowledge and experience to help a company navigate during challenging times.
Ultimately, it is most important to find a long-term financing provider with significant access to capital, that will grow with a company by continuing to provide financing over time. If you are interested in accessing long-term financing, Prudential Private Capital is here to help.