Securing Capital: Long-Term Funding Strategies for Businesses

External Financial Resources: Medium and Long Term

Companies require various financial resources. Besides providing its own funding, a business often needs to utilize external financing. Medium and long-term funding resources are those which the company utilizes over a period longer than one financial year and, once that time has passed, must repay, typically with interest. Key medium and long-term resources include:

1. Medium to Long-Term Loans

Firms borrow from credit institutions (banks, savings banks, etc.) to finance purchases of fixed assets. Fixed assets are all those goods that the company uses to produce (i.e., machinery, buildings, computers, etc.). Due to their high value, companies usually seek medium to long-term loans. This money will be refunded with interest according to the terms of the contract.

2. Borrowings (Bond Issuance)

When a company needs large sums of money, it can obtain them through the issuance of a borrowing (or bond issue/empréstito). A bond issue is, basically, dividing the total money needed into small quantities, represented by securities. These securities are offered to the general public so that investors who buy them become creditors of the company, holding the value of the securities purchased. Investors acquire the right to charging interest and the return of the amount delivered at agreed deadlines. Only large companies often turn to this type of financing.

3. Leasing (Financial Lease)

When companies need new equipment, they can purchase it or lease it through a Leasing Operation. This transaction is a leasing contract whereby the Lessor leases an asset to the company (the Lessee), who agrees to pay fees for the rental. The leasing contract normally incorporates a purchase option (call option) when the rental period ends. Leasing is therefore a form of medium and long-term financing as it allows the firm to use property without needing equity or going to a traditional credit institution.

Objections to Leasing:

• High Cost: The amount of contributions in Leasing incorporates the depreciation of the asset, a portion of interest, administrative expenses, and a risk premium (if the client fails or defaults).

Benefits of Leasing:

• No need to worry about finding financial resources for the acquisition of assets.
• Obtaining tax advantages (fiscal benefits).

4. Renting (Operating Lease)

Renting is a modality that involves the rental of movable property (e.g., cars, computers, trucks, etc.) over the medium and long term. In a renting contract, the Renter agrees to pay a fixed monthly income for a specified period, and the renting company undertakes to provide a series of services:

• Provide the asset for use during the contractual term.
• Maintenance of the asset.
• Hiring a comprehensive insurance policy (full risk insurance).

The rental income associated with this method is a tax-deductible expense 100%.

Renting Contract Details:

There is a minimum duration for the contract term. At the end of the contract term, the renting company offers the lessee the option of replacing the equipment or renewing the contract for a period to be determined.

Renting vs. Leasing: Key Difference

A key difference compared to Leasing is that there is no purchase option available for the tenant at the end of the contract.