Factors That Impact Long-Term Debt Financing
Several factors impact long-term debt financing, including capital structure considerations, maturity matching, and effects of interest rates.
Capital Structure Considerations
Maturity Matching
Effects of Interest Rates
Companies must account for capital structure considerations when they evaluate different financing options. Companies often mix long-term financing within their organization so they can retain flexibility with their overall operations. Fluctuations in these types of financing can have some effect on the overall weighted average cost of capital for the company, so management has to keep an eye on this overall.
Financial managers must also consider maturity matching. When companies issue debt to investors, they must also consider their future capital needs so they can retire this debt when it comes due. Maturity matching involves monitoring the different issues companies have out and the maturity dates. Companies try to level out the maturity dates for these issues so they can use new issues to pay off old issues and the carrying costs of these issues remain minimal.
Companies also monitor the effects of interest rates on their mix of debt and equity. As interest rates increase, the attractiveness of new debt decreases. Equity becomes more attractive as the cost of new debt increases. Companies evaluate these considerations and weigh their options so they do not increase their overall long-term weighted cost of capital.
