LONG-TERM DEBT RECOMMENDATION FOR CREATIVEMIND

As CreativeMind seeks to expand and requires $300,000 in funding, choosing the most suitable
long-term debt financing option is crucial for the company’s continued growth and financial
stability. Given the company’s established success and growth trajectory, I recommend a term
loan as the most suitable type of long-term debt financing.

1. TERM LOAN

A term loan involves borrowing a fixed amount of money that is repaid over a specified period,
typically ranging from one to ten years, with a fixed or variable interest rate. Here’s why a term
loan is preferable:
a. Predictability Of Payments
Term loans offer predictable repayment schedules, usually with fixed monthly payments that
include both principal and interest. This predictability allows CreativeMind to budget effectively
and plan its cash flow with greater certainty (Ross, Westerfield, & Jordan, 2022).

b. Competitive Interest Rates

Term loans often come with competitive interest rates, especially if the borrowing company has a
strong credit history and stable revenue streams. CreativeMind’s established success increases its
chances of securing favorable terms from lenders (Brealey, Myers, & Allen, 2019).
c. Flexibility
Lenders may offer flexibility in terms of loan duration and repayment terms. CreativeMind can
negotiate terms that align with its expansion plans and projected cash flows, ensuring that the
debt service does not hinder its operational capacity (Miller & Modigliani, 1961).

2. ALTERNATIVE OPTIONS AND THEIR LIMITATIONS

a. Bonds
Issuing corporate bonds is another long-term borrowing option. However, bonds are more
suitable for larger companies due to the complex issuance process, higher legal and
administrative costs, and the need for a strong market reputation. For a $300,000 requirement,
the cost and complexity of issuing bonds may outweigh the benefits.
 b. Convertible Debentures
Convertible debentures offer the potential to convert debt into equity, providing an attractive
option for companies with high growth potential. However, this could lead to dilution of
ownership for existing shareholders. CreativeMind might prefer to retain full control and
ownership during its expansion phase.

c. Leasing
Leasing can be an effective way to finance specific assets without large upfront costs. However,
it is not ideal for covering broader operational or expansion costs. Leasing also typically involves
higher long-term costs compared to direct ownership through financing.
d. Lines of Credit
While lines of credit provide flexibility, they are better suited for short-term financing needs
rather than long-term strategic investments. The variable interest rates associated with lines of
credit could also introduce uncertainty in cash flow management.

3. JUSTIFICATION FOR TERM LOAN OVER OTHER OPTIONS

Given CreativeMind’s need for a substantial amount ($300,000) and the desire for predictable
repayment terms, a term loan stands out as the most practical and efficient financing option. It
allows the company to manage its debt repayment in a structured manner, with clear timelines
and manageable financial commitments. This aligns well with the company’s expansion strategy,
providing the necessary funds while maintaining financial stability and minimizing risks
associated with variable interest rates or market volatility.
CONCLUSION
In summary, a term loan is the most suitable long-term debt financing option for CreativeMind’s
$300,000 funding requirement. It offers predictability, competitive interest rates, and flexibility,
making it a preferable choice over other alternatives like bonds, convertible debentures, leasing,
or lines of credit. By securing a term loan, CreativeMind can confidently proceed with its
expansion plans, ensuring continued growth and success.

REFERENCES
Brealey, R. A., Myers, S. C., & Allen, F. (2019). Principles of Corporate Finance (13th ed.).
Google Books. Retrieved from
https://books.google.com.ng/books/about/Principles_of_Corporate_Finance.html?
id=0280wAEACAAJ&redir_esc=y

Miller, M. H., & Modigliani, F. (1961). Dividend policy, growth, and the valuation of shares. The
Journal of Business, 34(4), 411-433.
http://dx.doi.org/10.1086/294442

Ross, S., Westerfield, R., & Jordan, B. (2022). Fundamentals of corporate finance (13th ed.).
McGraw-Hill Education. https://www.mheducation.com/highered/product/fundamentals-
corporate-finance-jordan-westerfield/M9781260772395.html
ISBN: 9781260772395
(Word count: 547)