You’ve got a great idea for a business.
Or perhaps you’re already running one, but it’s time to take it to the next level. You need money to finance your growth and make sure it does so sustainably—but where do you turn?
Unless you are one of the lucky few who has a crazy rich uncle or incredible business skills that have generated an overflow of cash, you will likely need to obtain financing for your business at some point. Fortunately, there are a lot of long-term financing options available. But figuring out the right one for your social impact business can be tough.
Let’s break down the best ways to fund your business for good in the long term and help you determine the perfect option for your needs.
How to Know If You Need Long-Term Financing
Long-term financing is a type of loan that you’ll repay over an extended period, usually one year or more. It’s often used to finance major purchases or investments, such as expansion projects and buying heavy equipment.
Your mission-driven company might need long-term financing in these instances:
- Business acquisitions. Since the amount you could get is fairly high and so is the repayment period, it’s easier to acquire a new business and repay with profits.
- Commercial real estate purchase. Looking to buy your own real estate for your office? Investing in a model which can be repaid over a long period is always financially viable.
- Equipment purchase or lease. Working with top-of-the-line machinery and technology gives you a competitive edge. You could obtain them through long-term funding.
Long-Term Financing Strategies
Though slightly more difficult to get compared to short-term financing, long-term financing could help businesses in their plans that go beyond three years. Here are some of the options you can explore for long-term funding.
Equipment financing provides you with the necessary capital to purchase heavy equipment and machinery for your business. Manufacturing and construction firms are the types of businesses that use this type of financing the most. But they could also be used to finance office equipment, software systems, restaurant materials, vehicles, and more.
In equipment financing, you borrow money from a lender to purchase equipment that will serve as collateral. You may be able to take out a loan to make upgrades or repairs on existing assets. The lender can take the equipment to satisfy debt in case of failure to repay the amount.
Since equipment is a long-term asset, it’s better to fund it with long-term debt financing. Using a credit line for this purpose will lead to higher financing costs. Equipment financing could also be more economical in the long run as it allows you to build up equity in an asset.
Project-based financing refers to the funding of long-term infrastructure, industrial projects, and public services using either a non-recourse or limited recourse financial structure. It works best for long-term capital-intensive projects. Here, the borrower pays the lender back using the cash flow generated from the project.
In this financing strategy, the loan structure is hinged upon the project’s cash flow for repayment with the project’s assets, rights, and interests held as secondary collateral.
IP-backed loans are beneficial for businesses that lack tangible assets or cash flow to support a traditional credit solution. In IP-backed financing, you’ll receive cash from lenders based on the value of your intellectual properties. Lenders usually secure a security interest in a company’s IP assets as collateral in exchange for interest payments.
It’s important to note that IP-backed loans are typically determined by the percentage of the IP portfolio’s liquidation value and overall risk, which will be determined by the lender or investor.
Pros and Cons of Long-Term Financing
The biggest benefit of long-term financing is its capacity for high capital. It’s ideal for social impact businesses that need huge amounts of money for massive marketing campaigns, international expansion, extensive product development, and other huge costs of operating a large company. Long-term repayments allow businesses to keep payments manageable.
But even though it may be a great way to obtain high financial capital, it isn’t quite as accessible as short-term financing. Some of its cons include:
- Stringent financial requirements. If you don’t have massive cash flow already, then long-term financing might not be for you.
- Limited choices. When you seek out long-term financing, you’ll usually find it with large, traditional banks that provide funding on their terms—and that just means limited choice, collaboration, or flexibility in the matter.
- Collateral required. Banks and credit unions usually require collateral to secure a loan.
- Extended repayment obligations. Lengthy paybacks can be a boon or a bane to your business. While it might mean easier management of repayments, it could also result in long-term financial stress on your business.
It can be overwhelming and even a bit scary, trying to figure out what kind of long-term finance strategy is right for your social impact business. It’s important to do your research and find the best option for you and your business to obtain mission-driven finance. Do not be afraid to ask questions—and don’t forget to consult with a financial expert.
With careful planning, you could finance your business in a way that helps it grow sustainable and succeed. If you are considering external financing options, a fractional CFO could help you determine what financing strategy is right for you. Schedule a call with Profit Reimagined™ to best option for long-term financing for your business and provide clarity of the future.