Long Term vs. Equity Financing

by Justin Johnson

Financing business activities is an important decision that management and finance executives must make. Financing can be a necessity for purchases of fixed assets and other business assets and activities. Long tern financing and equity financing are two types of financing that businesses can utilize.

What is Long Term Financing?

Long term financing refers to loans from banks or other financial institutions that carry a term of longer than three years. Some of these loans have terms as long as twenty years, but most are between three and ten years. Long term financing is typically secured by some type of collateral, most often some of the company's assets. The loan is usually repaid through a series of payments, according to an amortization schedule provided by the loan provider. Acquiring long term financing can be a difficult task for some business that have poor credit or little credit history.

What is Equity Financing?

Equity financing refers to the process of acquiring financing in exchange for a share of ownership of the firm. Venture capital, money from companies that invest primarily in start-up companies, is a common form of equity financing. Equity financing can be an effective method of raising capital when the company has little to no credit history.

Long Term Financing Considerations

Long term debt financing can present business owners with a number of advantages, namely retaining decision-making control of the company. Business owners who are apprehensive to give up a portion of the control of their business to outside investors will find long term debt financing attractive. However, long term debt financing can place a heavy interest burden on the company that can affect the bottom line profitability of the firm.

Equity Financing Considerations

Equity financing can be an attractive means of acquiring financing on multiple levels because of the benefits that can be reaped from the experiences and contacts provided by the investors. Equity financing can be effective for business owners who are seeking funds without the burden of a long-term repayment commitment. However, equity financing can present challenges to owners seeking autonomous control over their business, as the outside investors will likely demand a share of the decision making power of the company.

About the Author

A southeastern Ohio native, Justin Johnson is a finance professional with accounting and financial planning experience in various manufacturing industries. He discovered a love for writing as student at Pensacola Christian College and after learning many lessons in the workplace, he enjoys writing business and finance pieces.

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