Sunday, November 8, 2015

Kinds of Long-Term Financing

Long-term debt is characterized by being debt that will last in duration for more than a year. There are several sources of long-term debt for an organization to use.
The first of these is a long-term note. With a long-term note, the organization just borrows money from a lender with a promise to pay at a certain interest rate and payments at certain times. This form is considered an unsecured debt. The organization can lock in a better interest rate by pledging collateral against the loan. This is an asset the organization promises to forfeit if they default on payments of the note.
A second kind of long-term debt is a mortgage. A mortgage is like a collateralized long term note, but the mortgage is secured by a specific asset, usually real estate. Usually a mortgage exists to purchase the building or land. There are multiple structures to how the repayment schedule of a mortgage is set up, but it is usually a set payment every month.
A third kind of long-term debt is bonds. With bonds, the organization is borrowing a lot of money, but the borrowing is not coming from one institution as it might be when borrowed as a long-term note or mortgage. A bond is usually set up as promise to pay the holder of the bond a set amount of interest payment (normally twice a year) for the length of the bond, and then payment of the par value of the bond when the time period comes due.
The final kind of long-term debt is a capital lease. With a capital lease, the organization is not taking ownership of the capital item, instead is paying a third party that maintains ownership, and to which the capital item will revert to when the term of the lease expires.