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What is Long-Term Debt Financing?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 08 November 2016
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    Conjecture Corporation
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"Long-term debt financing" is a term used to describe any type of financing arrangement that will require longer than one twelve month period to repay. Within a business setting, this type of financing is often used to acquire goods that will remain useful for over that period of one year, effectively making it possible for the business to derive direct benefits from the purchase for an extended period of time. Companies often use this particular financing approach to purchase equipment used in the manufacturing process or some asset that will aid in revenue generation for at least as long as it takes to pay off the debt, and often well beyond.

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There are a number of ways to go about long-term debt financing. For companies, selling bond issues is one solution. Bonds make it possible to take in the money needed for a specific project, such as the building of new facilities as part of an expansion project or even the launch of a new product. The goal is to arrange for the repayment of the bonds plus interest to occur once the project has begun to generate revenue for the business. For example, a company that chooses to build an office building using debt from bond issues will set the maturity date for that bond to occur after construction is completed and tenants have signed leases and moved into the offices. This allows the company to finance the costs of the building project with relatively stress on other company assets or cash flows.

A second approach to long-term debt financing is obtaining a loan. This process does involve accepting a schedule of payments to retire the debt, and may also require that the company provide some sort of security or collateral for the loan. During the life of the loan, the business makes payments according to the schedule, incrementally retiring both the principal and the interest due the lender. Typically, the duration of the loan should not exceed the life expectancy of the equipment or other products acquired with the proceeds from the loan. Depending on the nature of the reason for the loan, it is possible that the project will begin to generate revenue at some point, making it possible to settle the long-term debt financing in full or at least manage the payments using the funds received directly from that project.

With any form of long-term debt financing, the idea is to secure a useful asset that will benefit the company for at least as long as it takes to repay the debt. Often, companies use this form of financing to establish some means of continuing to generate revenue long after the debt is paid in full. As with any type of financing endeavor, care must be taken to evaluate the terms of the financing and make sure the business can honor those terms before making the commitment to one or more lenders.

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