Final answer:
Nonprofits have several long-term financing options, including bonds, loans, and donations. Borrowing allows nonprofits to maintain control but requires reliable income for interest payments. Firms choose financial sources based on control, financial obligation, and strategic goals.
Step-by-step explanation:
Long-term Financing Options for Nonprofits
Nonprofits often have unique financial needs and constraints, which can make finding long-term financing a challenge. Unlike for-profit businesses that can issue stock to raise capital, nonprofits rely on different forms of funding. Some key options include issuing bonds, obtaining long-term loans from financial institutions, launching capital campaigns, applying for grants, and receiving large-scale donations or endowments.
Benefits and Drawbacks of Borrowing for Nonprofits
One of the key benefits of borrowing for nonprofits is the ability to maintain organizational control without being answerable to shareholders. Additionally, loans or bonds can provide the necessary funds to sustain and grow the organization's operations. However, the major drawback is the commitment to scheduled interest payments, which demands a reliable income stream that can be challenging for some nonprofits to predict and maintain. Another disadvantage is the potential strain on the organization's financial health if they become over-leveraged.
Firms' Choices Between Sources of Financial Capital
When firms choose between sources of financial capital, the decision typically revolves around a trade-off between control and financial obligation. Borrowing involves interest payments but allows the firm to remain independent, whereas issuing stock dilutes ownership but could provide a bigger injection of capital without the obligation of regular repayments. The choice often depends on the firm's current financial situation, future income projections, and strategic goals.