Prudential Capital’s Josh Shipley, Ed Jolly, Mitch Reed and Ashley Dexter explain ‘long-term financing’ and how many companies utilize this patient and strategic form of funding.
Long-term financing is any sort of debt financing that would be repaid after about five years. Because it has a longer tenor, long-term financing is a more permanent layer of capital in a company's capital structure. Also, it often carries a fixed rate and is typically raised on a non-amortizing basis. Consequently, long-term financing tends to be viewed and used as a patient and more strategic type of capital in a company's capital structure, designed to match against longer-term initiatives.
It is often considered prudent to utilize some long-term financing in conjunction with short-term financing, using the long-term financing to match the life of the debt, or liabilities, with the life of the investment, or assets. If a company has a major capital spending program, such as building a manufacturing facility, or they’re making an acquisition that might have a longer payback period, it is often appropriate to use a longer-term debt instrument to finance that project.
Companies can also utilize long-term financing to layer different maturities into their capital structure, which can reduce the refinancing risk associated with having only short-term financing. Additionally, the fixed rate that is typically associated with long-term financing gives companies the ability to lock in borrowing cost and reduce interest rate risk as well as balance sheet risk.
Another reason companies may want to introduce long-term financing into their capital structure is to prepare for market volatility. For companies that are 100% reliant on one funding source, such as the bank market, their access to capital can be strained if there are constraints on that market, whether for regulatory reasons or due to the health of that market.
Companies can look to the capital markets, such as the public bond or private placement markets, to raise long-term financing. Prudential Private Capital has been providing long-term financing for more than 75 years, being there for companies when things are good and when things aren't so good. We have the experience to help businesses determine what they might need from a capital perspective and what opportunities there may be, with a long-term focus.
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