What is Permanent Financing?
Permanent financing is a type of loan or other financing that is intended to remain in place for an extended period of time. This is in contrast to short-term financing, which is intended to address a need and be repaid within a period of ten years or less. As a general rule, permanent financing involves lending situations that will continue for a duration of more than ten years, and possibly operate with an amortization schedule that will exceed fifteen years.
One of the most common examples of permanent financing is a home mortgage. This type of long-term financing is likely to require monthly payments that will extend over a period of thirty years or more. Throughout the process, the borrower repays the lender a portion of the principal as well as some amount of the interest due on the overall loan during each calendar year. Ideally, the mortgage carries a rate of interest that the borrower finds equitable, and the loan is not refinanced at any type during the duration of the original contract.
Equity financing of this type is also often employed in business settings. A company may use permanent financing as a way to purchase existing facilities from another business, or to construct new facilities designed especially for the use of the company. Since permanent financing often carries terms for repayment that make it easy for businesses to repay the loans without creating a great deal of financial stress, this approach allows time for the newly built or acquired facility to begin generating revenue and become capable of repaying the loan. Once this is taking place, the loan can be managed without the need to divert assets from other facilities to repay the debt.
Small businesses as well as large corporations can use the concept of permanent financing to position themselves in the most secure financial position possible. For example, a real estate prospector may choose to use permanent financing to construct a small apartment complex. Once the project is completed and the units occupied, the rental income helps to cover the cost of the monthly repayment, thus making the project self-supporting. As a result, the owner does not have to use his or her other financial resources in order to fund the project or handle the repayment of the long-term loan. Once the loan is repaid in full, the owner can reap the full benefit of the flow of revenue from the apartment complex, since the asset is paid in full and no longer carries any type of debt load.
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