Problems in Raising Long-Term Finance

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Long-term finance is problematic because of rate risk and uncertainty.
Long-term finance is problematic because of rate risk and uncertainty. (Image: Web-shopping image by Mykola Velychko from Fotolia.com)

Short-term financing is typically much less stressful than raising long-term capital. The reasons are simple and straightforward. Whether seeking personal or business financing, short-term issues and conditions are fairly easy to analyze and predict. However, just as it's more difficult to predict the long-term success of a professional sports team or future weather conditions, projecting financial abilities of individuals or companies over time is a challenge--for both borrower and lender.

Future Uncertainties

The primary problem in raising long-term financing relates to uncertainties. Walking in the shoes of a lender explains the constant lender concerns in this area. While there are many success stories, Microsoft, IBM, Ford, Google, etc., of small companies reaching incredible success, future successes, for individuals and companies, are difficult and risky to predict. Successful long-term finance depends on successful long-term profits for individuals and organizations.

Rate Risk

Both lender and borrower face rate risk with long-term finance. As every borrower and lender knows, predicting short-term interest rates is fairly easy and only marginally risky. However, anticipating long-term rate changes is a formidable challenge, regardless of the “expert” predictions or available data. Problems in raising long-term finance, particularly in a period of rate fluctuation uncertainty, are magnified when dramatic rate risk becomes reality.

Long Repayment Cycles

The longer the repayment cycle, the higher the risk to the borrower and lender. This is particularly true when comparing individual to commercial lending. For example, the “market” accepts 30-year (sometimes, even 40-year) repayment cycles while commercial loan terms, even for real estate, seldom exceed 15 to 20 years. Extended repayment cycles pose higher risk to both lenders and borrowers. New businesses pose even potential problems as 80 percent of new businesses fail in the first two years.

Global Economic Influences

The global economy, unlike in past decades, influences the availability of long-term finance. As business results are more affected by conditions in Europe and Asia, long-term finance is often influenced on a local level. Long-term issues, with their inherent rate and repayment risk, are further complicated with world-wide economic influences. The Internet and electronic media often mold perceptions of and/or affect investor/customer moods, which, in turn, affect the availability of long-term finance solutions for both individuals and companies.

Competition Considerations

Competition always influences long-term finance. Branding and public perception, regardless of local, national or global economic distress, are critical to availability of long-term finance. Lenders, particularly commercial banks, need to maintain strong long-term finance efforts. While local, national or international financial considerations cannot be ignored, lenders must monitor and meet competitive challenges to succeed.

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