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What is Permanent Financing?

2017-06-09T07:04:40+00:00

The term 'Permanent Financing' is included in the Corporate Finance edition of the Financial Dictionary. Get yours now on amazon in ebook or paperback format. Read more here...

Permanent Financing refers to a longer term loan or debt instrument. It can also be thought of as longer term equity financing or debt. Most of the time, such long term financing becomes utilized to buy or develop the kinds of long lasting fixed assets like machinery or factories. The payoffs and contributions from such longer term assets happen over grater lengths of time. This is why long term financing makes sense in order to lessen the risks that the principle will not be paid down or off, as could be the situation with debt financing.

With longer term debt financing, money will be borrowed from a third party source so that a business can finance a particular project and the associated assets or purchases. On the other hand, longer term equity financing centers on putting up company assets in exchange for obtaining funding for particular projects and their relevant asset purchases. There are many cases where a partial ownership stake in a corporation will be offered so that the firm is able to come up with the necessary capital for the projects. Both opposing options come with their own pros and cons. This is why the owners of the company or the corporate directors will be the ones who have to decide for themselves which choice works best for their particular enterprise and scenario.

Such Permanent Financing should never be confused with shorter term financing. There are several critical characteristics that differentiate the two types. Short term financing requires that the debt be paid back in under 12 months. The opposite idea of this is the long term debt option. Such debt will offer more than 12 months and often times many years or even decades to repay it. There are many types of longer term debt. Among the most popular of these are bonds, mortgages, and loans.

Another difference between short term and long term debt lies in the repayment schedule. Short term debt is often repaid in a single lump sum repayment. With the Permanent Financing or longer term debt, these payments can be either made annually, monthly, or in a few periodic lump sum repayments.

The reasons for such debt issues is another major difference between the two types. Short term debt has a purpose of financing daily operations. An example of this might be for those firms that operate in a seasonal industry and capacity. Christmas shops are one such example. They could need short term resources in order to cover their materials, payroll, and leasing costs up to the point that their Christmas products start selling in earnest. The revenue is then utilized to pay down short term debt.

On the other hand, longer term debt is specifically utilized for buying assets that require often a few or even many years in order to pay for their cost and upkeep. A Christmas shop might want to avail itself of this type of debt facility in order to pay for constructing a bigger Christmas ornament and goods production factory. They would be able to repay the longer term loan little by little over the ensuing years. It would allow them to take advantage of the rising revenue stream and resulting profits created by the higher production output of the long term new factory facility.

It is not only businesses that can take advantage of Permanent Financing. The sovereign governments of the world similarly use longer term financing routinely to pay for their annual budget deficits. In the case of the United States, these instruments take the form of longer dated and maturing Treasuries. Good examples of these longer term debt government obligations are both 10 year and 30 year Treasury Bonds.

The term 'Permanent Financing' is included in the Corporate Finance edition of the Financial Dictionary. You can get your copy on amazon in Kindle or Paperback version. See more details here.