Example of financing options
Suppose that you represent a private corporation attempting to arrange financing for a new headquarters building. These are several options that might be considered:
Use corporate equity and retained earnings:
The building could be financed by directly committing corporate resources. In this case, no other institutional parties would be involved in the finance. However, these corporate funds might be too limited to support the full cost of construction.
Construction loan and long term mortgage:
In this plan, a loan is obtained from a bank or other financial institution to finance the cost of construction. Once the building is complete, a variety of institutions may be approached to supply mortgage or long term funding for the building. This financing plan would involve both short and long term borrowing, and the two periods might involve different lenders. The long term funding would have greater security since the building would then be complete. As a result, more organizations might be interested in providing funds (including pension funds) and the interest charge might be lower. Also, this basic financing plan might be supplemented by other sources such as corporate retained earnings or assistance from a local development agency.
Lease the building from a third party:
In this option, the corporation would contract to lease space in a headquarters building from a developer. This developer would be responsible for obtaining funding and arranging construction. This plan has the advantage of minimizing the amount of funds borrowed by the corporation. Under terms of the lease contract, the corporation still might have considerable influence over the design of the headquarters building even though the developer was responsible for design and construction.
Initiate a Joint Venture with Local Government:
In many areas, local governments will help local companies with major new ventures such as a new...