Long-Term Financing Alternatives
Long-term financing is a money-borrowing method that companies and individuals use when they are short on capital. While short-term financing is typically used to provide funds that must be paid back within the year, long-term financing is used to provide money for more than one year (Block & Hirt, 2005). Companies of all sizes use long-term financing to fund activities such as increasing facilities, purchasing machinery and performing large-scale construction projects. A variety of long-term financing options exist; however, three of the most popular are stocks, bonds and leases.
A stock is a share in the ownership of a company, which represents a claim on the company’s assets or earnings (Block & Hirt, 2005). The two main types of stocks are common stock and preferred stock. Common stock, the more popular option, typically comprises the majority ownership of a company (Block & Hirt, 2005). When a company does well, and its business or stock prices increase, its investors (stockholders) profit either through annual dividends or retained income for the company.
Preferred stock is the second type of stock. Preferred stockholders have greater claim to a company’s assets and earnings and are paid dividends before common stockholders. Unlike common stock, preferred stock dividends are paid at regular intervals and are typically guaranteed as a kind of fixed-income security. Receiving a “stipulated dividend” may be an advantage to preferred stock (Block & Hirt, 2005); however, a disadvantage preferred stockholders face is limited say-so in company decisions.
A bond is a sum of money an investor loans to a company or individual in exchange for a predetermined interest rate. This long-term financing option typically requires interval dividend payments (e.g. monthly or yearly) for a given period until the principal is paid in full at the end of the term. Bonds are valuable because they provide a quick...