Long-term financing is financing that is provided for a period of more than one calendar year. This is in contrast to short-term financing, which involves loans and other forms of credit that are to be repaid in one year or less. Many businesses make use of long-term financing as a means of managing expansion projects without tying up a large amount of their available resources.
There are a number of reasons why an individual or a business would choose to go with long-term financing. In some cases, the issue is based on capital shortage; the entity wishes to move forward with a given project, but lacks the cash in hand to do so. At other times, the long-term financing is a way to manage the costs of the project in a manner that provides time for the project to begin generating revenue on its own. With this model, the idea is to manage payments on the debt from existing resources until the project becomes self-supporting and can provide all the cash needed to repay the lender.
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Many lenders provide long-term financing as a means of allowing people and businesses to secure what they need today and pay for it over an extended period of time. For an individual, purchasing a home with the aid of a mortgage is a common example of this type of financing. Businesses may use long-term loans to build additions to existing facilities, purchased assets that are anticipated to increase in value and generate a return, or to buy machinery that helps the business increase its rate of productivity. If a business is currently undergoing a downturn in its profits, but has reasonable expectations of returning to profitability, long-term financing may provide the capital needed to get through the period and prepare for the time when the business regains its former profit levels.
In most cases, obtaining long-term financing requires that the applicant have an acceptable credit rating and exhibit a reasonable ability to repay the loan according to the terms and conditions put in place by the lender. Repaying of this type of financing can vary from the basic monthly payment on the outstanding debt to the use of balloon payments that come due at specific times during the life of the loan. Lenders typically work with clients to identify the type of structure of the financing that will provide the greatest benefit to both parties.
Before committing to any type of long-term financing, it is important to read and understand all the terms and conditions found in the contract that will govern the loan. Should any clause or section of the contract cause some concern on the part of the borrower, and the answers regarding the intent of the clause are not satisfactory, the borrower would do well to seek financing from another source. Since the commitment is one that can span anywhere from a year to forty years or more, it is essential to make sure the terms are workable for the entire life of the business relationship.