Long-Term Debt comprises of loans and financial commitments that typically last for over a year or more.
Debt financing basically involves company borrowing money in order to keep its business running.
Therefore plugging both the pieces together defines long term debt financing as a process of borrowing money to keep the business running and funding larger assets such as plant and machinery, buildings, land etc. A point to be noted here is that loans/borrowings that are maturing in less than a year are not considered as long term debts.
Some examples of long term debt instruments are,
* Debentures – wherein an organization can raise capital without diluting its ownership or utilizing its assets which in turn allow the assets to be used later for other capital funding activities.
* Shares – Both common and preferred constitute a form of equity financing.
* Fixed Deposit Loans
* Interest only futures
* Option on future contracts
Apart from the above there are a lot of other financial considerations/alternatives too at a companies’ disposal when trying to secure funds and pursue its goals of running a business that translates into sustainable financial returns for itself and its shareholders.
Even in challenging times, while deciding to seek equity or debt financing is largely based on an organization’ needs and long term strategy, than external factors of the market. An important point to be noted here is that debt financing generally is cheaper on absolute basis from equity capital. However, debt financing has its own caveats too because it is far more restrictive. Debt payments can restrict an organizations’ ability to continually invest in the business to meet its infrastructure, recruitment and R&D needs.
Getting the debt/equity mix right is a complex process and a successful businessman must be able to gauge all the differences between debt and equity financing. Without getting into too many details one fundamental distinction is that equity involves the exchange of permanent equity capital for a part of ownership.
Therefore only those companies that are able to strike the right balance and get their debt/equity ratio right yield the best returns over the longer term for themselves and their investors.
The Final word - In these uncertain market conditions, is it the right time to borrow for business growth? Well for professionally managed companies, both debt and equity instruments are widely available and in most cases long term debt financing is still proving very profitable for bringing an organization's growth strategy to life.