Long-term finance can be defined as any financial instrument with maturity exceeding one year (such as bank loans, bonds, leasing and other forms of debt finance), and public and private equity instruments. The main characteristics of retained profits are that there is no compulsory maturity like term loans and debentures and they are not characterized by fixed burden of interest or installment payments like borrowed capital. Debentures 5. These sources are particularly important for small businesses which may find it difficult to get external finance. The advantages of debentures are as follows: i. Term loans differ from short-term loans which are employed to finance short-term working capital need and tend to be self-liquidating over a period of time usually less than a year. (B) Disadvantages or Dangers of Excessive Ploughing Back: (i) Misuse of Retained Earnings It is not necessary that the management may always use the retained earnings to the advantage of shareholders. It is usually done for big projects, financing, and company expansion. Suppose a company wants to raise money via NCD from the general public. Allow debenture holders to receive fixed rate of interest, iii. These preference shares are issued for a fixed time-period and are paid during existence of the organization. Paying dividend on equity shares is not an obligation for an organization when there is less profit or loss, ii. After the maturity of the financed the borrower needs to return the financier the real amount with some profit and interest. The profits available for ploughing back in an enterprise depend on factors like net profits, dividend policy and age of the organization. They have voting rights to elect directors of the company and the directors control the business. This article shall discuss major sources of long-term debt financing for most corporations. 4) Paytm to raise funds via selling a significant controlling stake in the company to Warren Buffet for $10-$12 billion. This can include real estate, patents, works of art, and other assets controlled by the company. In fact, the foremost objective of a company is to maximise the value of its equity shares. After discussing the characteristics and types of equity shares, let us look at their following advantages: i. Term loans carry a fixed interest rate and the payment is made in installments which consist of both principal and interest. CFA Institute Does Not Endorse, Promote, Or Warrant The Accuracy Or Quality Of WallStreetMojo. The interest on term loans is a definite obligation that is payable irrespective of the financial condition of the firm. In most developing countries like India, domestic capital is inadequate for the purpose of economic growth. These are also known as preferred stock or preferred shares. Bankruptcy refers to the legal procedure of declaring an individual or a business as bankrupt. Long term sources of finance are the institutions or agencies or institutions from which finance/ funds can be raised for a long period of time. Equity warrant is generally attached to non-convertible debentures as a sweetener to improve their marketability. Do not require any security from the organization. (v) Not Entitled to Tax-Benefits Lessee is not entitled to certain tax benefits like depreciation and investment allowance because he is not the owner of the asset. The money raised from the market does not have to be repaid, unlike debt financing which has a definite repayment schedule. The common sources of financing are capital that is generated by the firm itself and . Preference share capital is another source of long-term financing for a company. Equity and Loans from Government 2. Leasing is, thus, a device of long term source of finance. The borrowing organization has to submit audited annual accounts report to the lender or financial institution, v. Details of fixed assets purchased from the loan. In case of lower profits, the company can reduce or suspend payment of dividend. When companies are considering new investments, they may compare available sources of finance to determine which would be most appropriate for a new endeavor. Huge Collection of Essays, Research Papers and Articles on Business Management shared by visitors and users like you. A repayment schedule is a complete table of periodic loan payments that includes an interest amount computed on the unpaid balance of the loan plus a portion of the unpaid balance of the loan. An organization uses term loans to purchase fixed assets and fund projects having long-gestation period. While the assets financed by loans serve as primary security, all the present as well as the future immovable assets of the borrower constitute secondary security. Covenants may also include the appointment of nominee director by financial institutions to safeguard their interests. The rate of interest is high for overdrafts compared to bank loans. Copyright 10. iv. The amount of earnings retained within the business has a direct impact on the amount of dividends. Depending on various factors, the period can stretch for more than 5 to 20 years. (b) Like other sources of debt financing, the lenders of term loans do not have any right to have direct control over the affairs of the company. (a) The directors of quoted companies occasionally get criticised for restricting the value of dividends and for hoarding too much cash in the business. (i) Additional Source of Finance Leasing facilitates the use of assets without making any immediate payment. Account Disable 12. Instalment credit 5. SOURCES OF LONG TERM FINANCE Presented by: Anu Damodaran MBA G Semester 2 AUD0260 Amity University, Dubai 1; Finance Finance is life blood of business Sources of finance 1. Rate of Return (ROR) refers to the expected return on investment (gain or loss) & it is expressed as a percentage. It is allowed to be deducted while arriving at the net profits of the firm subject to adherence of the percentages of allowable depreciation fixed under the tax laws. At the end of the period of lease contract, the asset reverts back to the lessor, who is the legal owner of the asset. The firms that choose to finance through the external sources can retain internal funds to cover the company in an emergency. Whenever an organization has accumulated surplus profit, it may distribute the profit among its existing shareholders by providing them bonus shares. Some of the new financial instruments are discussed below: Zero-coupon bonds are purchased at a high discount, known as deep discount, on the face value of the bond. The advantage of having internal accruals like depreciation and retained earnings is clearly seen in their characteristics. (b) If the purpose for utilization of retained earnings is not clearly stated, it may lead to careless spending of funds. Long-term finance Personal savings Personal savings is money that has been saved up by an entrepreneur. At the time of liquidation, these shares are paid after paying all the liabilities. (c) The term loans are negotiable loans between the borrowers and lenders. This is known as retained earnings. Secondly, equity shares have high floatation cost in terms of underwriting, brokerage and other issue expenses in comparison to other securities. They are a common source of long-term finance. (ii) Tax Benefits The lessor is entitled to claim the depreciation of leased asset and thus reduces his tax liability. long term finance is required for purchasing fixed assets like land and building, machinery etc.The amount of long term capital depends . Dilution of control is an inherent characteristic of financing through issue of equity shares. In addition, they can be issued at discount, par, and premium. It involves financing for fixed capital required for investment in fixed Assets. There are different vehicles through which long-term and short-term financing is made available. A portion of the net profits may be retained in the business for use in the future. The companys management needs to be assured about creating a mix of short-term and long-term financing sources. Short-Term Sources of Finance Short-term sources of funds: Money acquired must be paid back within one year. Similarly, when the company is wound up, they can exercise their claim on those assets which are left after the payment of all other claims including that of preference shareholders. They are issued under the common seal of the company acknowledging the receipt of money. (b) They are very flexible as the management has complete control over how they are reinvested and what proportion is kept rather than paid as dividends. The advantages of preference shares are as follows: i. The holders of these shares are the legal owners of the company. Characterize by fluctuations in returns, iii. Conversion is allowed only for the fully paid FCDs. The trustee is responsible for ensuring that the borrowing company fulfills the contractual obligations mentioned in the contract. SBA 7 (a) loans, for example, range from $25,000 . Lenders normally lend in proportion to the amount of shareholders funds. This may hamper the smooth functioning of an organization at times. Longterm sources of finance have a long term impact on the business. Following points discuss the types of equity shares in brief: Refer to shares that are issued in place of dividends. It may also be attached to convertible debentures and equity shares also to make these instruments more attractive to investors. On Tuesday . (ii) Restrictions on the Use of Asset Leasing contracts usually impose certain restrictions on the use of the asset or require compulsory insurance, and so on. Content Filtration 6. Debentures can be placed via public or private placement. Equity Share Capital: Equity shares, also known as ordinary shares or common shares represent the owners' capital in a company. The amount borrowed is paid back in installments over a predetermined agreed period of time usually 10, 20 or 30 years. There are other functional differences between the two- bonds carry lower rate of interest and lower risk as compared to debentures, are generally secured by collateral and are paid prior to debentures in case of liquidation. The main advantage is that it is not been paid immediately or within shorter time duration. The real position of lessor is not renting of asset but lending of finance and hence lease financing is, in effect, a contract of lending money. ii. (v) Dissatisfaction among the Shareholders Excessive ploughing back of profits may create dissatisfaction among the shareholders since the rate of dividend is quite low in relation to the earnings of the company. Equity shareholders control the business. Characteristics of Loans from Financial Institutions: (i) Maturity Maturity period of term loans provided by Financial Institutions ranges between 6 to 10 years. The sources of long-term finance refer to the institutions or agencies from, or through which finance for a long period can be procured. Financial Institutions may also restrict the payment of dividend, salaries and perks of managerial staff. If a company wants to raise money privately, it may approach the major debt investors in the market and borrow from them at higher interest rates. But, in India no such distinction is made between bonds and debentures and the two terms are used as synonymous. Trade Credit Lease Financing 7. However, for obtaining further finance in case of any existing company, the management should, as far as possible, avoid issuing equity shares. These loans carry at a floating rate of interest and predetermined maturity period. 19.2 Objectives. Provide no voting rights to debenture holders, ii. But, in case of companies Long-Term Sources of Finance Long-term financing means capital requirements for a period of more than 5 years to 10, 15, 20 years or maybe more depending on other factors. vi. Bearer Debentures Refer to the debentures that are not registered in the books of the organization. But, an existing company can also generate finance through its internal sources, i.e., retained earnings or ploughing back of profits. For new company recourse to equity share financing is most desirable because the management is under no legal obligation to pay dividends to shareholders and the management can retain its earnings entirely for their investment in the enterprise. Carry a fixed interest rate and the two terms are used as synonymous shares! It difficult to get external finance etc.The amount of earnings retained within the business for use in books... No such distinction is made between bonds and debentures and the directors the. 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