Long Term Financing Paper (Alternatives)
Long-Term Financing Alternatives
Debt Financing
Debt financing involves borrowing money that businesses pay back over a time with interest. Creditors agree to lend money to companies in exchange for repayment, with accrued interest, at a future date. The creditors do not take any ownership claim in the companies’ business. Debt financing is appealing to small businesses like sole proprietorships and partnerships because they do not have to sacrifice any ownership interests in their business, interest on the loan is deductible, and the financing cost is a relatively fixed expense.
With the increase in leveraged buyouts and acquisitions of companies that were not able to pay their debt obligations, corporate lenders have changed their policies. “They are insisting on higher interest rates and coupons for both investment grade notes and junk bonds, shunning bond structures known as "covenant-lite" for their easy terms and turning up their noses at all manner of gimmicky loans geared to make life easier for issuers.” (Sweeney, 2007, p. 40) “The disadvantages of debt financing are interest and principle payments are set by contract and must be met, regardless of economic position of the firm, indenture agreements may place burdensome restrictions on the firm, and debt may depress outstanding common stock values.” (Block and Hirt, 2005, p. 482)
Lease Financing
It is becoming more common in recent years for companies to use lease financing to obtain equipment and property. Lease financing or capital lease is long term financing that involves one of the four following conditions. “The arrangement transfers ownership of the property to the lessee at the end of the term or the lease contains a bargain purchase price at the end of the lease.” (Block & Hirt, 2005, p. 485) “The lease term is equal to seventy five percent of the property’s estimated life of the property or the present value of the lease payments...
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