What Is Long-Term Financing?

Long-term financing refers to the activities of an enterprise as the main body of financing to raise and concentrate long-term capital economically and effectively through long-term financing channels and capital markets and using long-term financing methods in accordance with its long-term needs such as operating activities, investment activities, and adjustment of capital structure. ^[1]

Long-term funding

The main body of financing is the enterprise

An enterprise is an independent legal person different from the owner. It can raise funds in the capital market while promising to provide returns. Companies can raise funds directly from potential capital owners in the capital market, such as by issuing shares,

1. Expansion financing motivation : Expansion financing motivation is the additional financing motivation generated by the enterprise to expand the scale of production and operation or increase the need for external investment.

2. Adjustable financing motivation : The adjustment financing motivation of an enterprise is the financing motivation of an enterprise due to the need to adjust the existing capital structure.

3. Mixed funding motive : The financing motive that an enterprise generates both to expand its scale and adjust its capital structure is called a mixed funding motive. That is, this mixed funding motive is compatible with both the expansive financing and the adjusted financing motive. .

Legality principle

2. Benefit principle

3. The principle of rationality

4. Timeliness principle

Government financial capital

Bank credit capital

3. Capital of non-bank financial institutions

4. Other legal person capital

5. Private capital

6. Internal Capital of the Enterprise

7. Foreign and Chinese Hong Kong, Macao and Taiwan Regional Capital

Due to different financing scopes, financing mechanisms and capital attributes, long-term financing of enterprises is divided into various types.

Internal and external funding

(1) Internal fundraising: Internal fundraising refers to the source of capital formed by retained profits within the enterprise.

(2) External funding: refers to the source of capital formed by external financing of the enterprise when the internal financing of the enterprise cannot meet the needs.

Direct and indirect investments

(1) Direct investment: Direct investment refers to a financing activity in which an enterprise directly negotiates capital with capital owners without resorting to banks and other financial institutions.

(2) Indirect financing: Indirect investment refers to a type of financing activity in which an enterprise leverages financial institutions such as banks to finance capital.

3. Equity financing, debt financing and mixed financing

(1) Equity fundraising: Equity fundraising forms the company's equity capital, also known as equity capital, which is the capital that an enterprise obtains in accordance with the law and owns for a long time, and can independently allocate and use it.

(2) Debt-based financing: Debt-based financing forms the debt capital of an enterprise, also known as debt capital, which is the capital that an enterprise obtains in accordance with law, uses in accordance with the contract, and repays on schedule.

(3) Hybrid fundraising: Hybrid fundraising is a type of long-term fundraising that combines the dual attributes of equity fundraising and debt fundraising. It mainly includes the issue of preferred stock financing and the issue of convertible bonds. ^[2]

The main issues in long-term funding decisions are

1. Combination strategy of short-term financing and long-term financing

(1) Stationary combination strategy

The stable combination strategy refers to the use of short-term funds for temporary liquid assets; and the use of long-term funds for permanent assets, including permanent current assets and fixed assets, to enable the use of funds and the availability of funds The deadlines can be matched with each other. The temporary liquid assets referred to here refer to seasonal or cyclical affected liquid assets; the permanent liquid assets referred to here refer to the current that must be retained in order to meet the long-term and stable funding needs of the enterprise. assets.

(2) Active combination strategy

Active portfolio strategy refers to the use of long-term funds to meet the needs of some permanent assets, while the remaining permanent assets and temporary assets are to be met with short-term funds.

(3) Conservative combination strategy

Conservative portfolio strategy refers to the use of long-term funds to finance not only permanent assets (permanent liquid assets and fixed assets), but also long-term funds to meet some or all temporary assets due to seasonal or cyclical fluctuations. Funding needs.

2. The impact of the combination of short-term and long-term financing strategies on corporate returns and risks . Different combinations of short-term and long-term financing will have varying degrees of impact on corporate returns and risks. Most of the capital sources of the company's capital are long-term funds, including long-term liabilities and equity capital. This part of the funds can be used for a long time after obtaining, the risk is small but the capital cost is high, and it will bring the burden of paying interest or issuing dividends on a regular basis. The remaining funds are short-term funds, mainly current liabilities. The cost of obtaining and using this part of the funds is generally low and flexible, but the use period is short and the risks are high. In the combination of short-term and long-term fundraising strategies, the returns and risks of the stable portfolio strategy are centered, the returns and risks of the active portfolio strategy are higher, and the returns and risks of the conservative portfolio strategy are lower. When choosing a combination of short-term funding and long-term financing, companies should consider the balance between long-term funds and short-term funds, and weigh the benefits and risks.