A debenture is a certificate issued by a company under its seal acknowledging a debt due by it to its holders. These are the profits the company has kept aside over time to meet the companys future capital needs. There are different vehicles through which long-term and short-term financing is made available. v. Redeemable Preference Shares Refer to the shares that are repaid by the organization. Long term finance are capital requirements for a period of more than 1 year. It may also be attached to convertible debentures and equity shares also to make these instruments more attractive to investors. ii. Investors who desire to invest in safe securities with a regular and fixed income have no attraction for such shares. Sweat equity shares are always issued at a discount. Long term 2; Basics Long term finance - Funding obtained exceeding three years in duration. iv. Equity warrant is generally attached to non-convertible debentures as a sweetener to improve their marketability. Provide low returns to preference shareholders, ii. They carry a fixed interest rate and give the borrower the flexibility to structure the repayment schedule over the tenure of the loan based on the companys. Therefore, it can be used to finance the capital needs in the normal business routine, and as such depreciation in true academic sense can be deemed as a source of internal finance. Sources of Long-term Finance. A new company can raise finance only from external sources such as shares, debentures, loans etc. Being the owners of the company, they bear the risk of ownership also. They have mostly securedloans offered by banks against strong collaterals provided by the company in the form of land and building, machinery, and other fixed assets. Lease financing, therefore, does not affect the debt raising capacity of the enterprise. Advantages and Disadvantages of Loans from Financial Institutions: Such loans offer all the advantages and disadvantages of debenture financing. Do not bind an organization to offer any asset as security to preference shareholders, v. Carry less risk for investors as compared to equity shares. (vi) Benefit of Maintenance Lessee gets the benefit of maintenance and specialized services provided by the lessor. Uploader Agreement. In USA there is a distinction between debentures and bonds. Sources of Long Term Financing #1 - Equity Capital #2 - Preference Capital #3 - Debentures #4 - Term Loans #5 - Retained Earnings Examples of Long Term Financing Sources Advantages of Long Term Financing Limitations of Long Term Financing Important Points to Note Recommended Articles iii. A debenture is a form of financial instrument that provides long-term debt to an organization. Even during the winding up of the organization, the investment of preference shareholders is paid before equity shareholders. As a result, the lender has a regular and steady income. A company can also raise funds through issue of preference sharesa special type of share capital. They have control over the working of the company. Assets which are financed through term loans serve as primary security and the other assets of the company serve as collateral security. In most developing countries like India, domestic capital is inadequate for the purpose of economic growth. Medium Term Source of Finance - These are short term funds that last more than one year but less than five years. (c) Sometimes, a conservative dividend policy leads to huge accumulation of retained earnings leading to over-capitalization. These shares are a kind of award for employees for the work rendered by them to organization. Equity Shares, also known as ordinary shares, represent the ownership capital in a company. Bonds 7. International Sources. (ii) Increase in Rate of Dividends In case of higher profits in the company, these shareholders are handsomely rewarded in the form of higher dividends. The control of the company may change to new shareholders who may reap the benefits of the companys prosperity and progress. Paying dividend on equity shares is not an obligation for an organization when there is less profit or loss, ii. (iv) Flexibility in Fixing the Rentals Lease rentals are fixed in such a way that the lessee is able to pay them from the cash flows generated from his business operations. 19 Sources of Long-term Finance 19.1 Introduction As you are aware finance is the life blood of business. Lease is a contract between the owner of an asset and the user of such asset. Help in collecting funds at the right time, iv. (iii) Free from Restrictive Covenants Lease financing is free from restrictive covenants whereas the financial institutions often put a number of restrictions on borrowers, such as, conversion of loan into equity, appoint nominee directors, restrictions on payment of dividend, and so on. There exists a controversy whether depreciation should be taken as a source of finance. Save an organization from unnecessary interference of preference shareholders as they do not enjoy any voting right, v. Prevent preference shareholders from claiming f or the assets of the organization. Bonds (debentures) belong to external sources of finance. They are designed to meet the long-term funds requirement of the issuer and investors who are not looking for immediate return. Whenever an organization has accumulated surplus profit, it may distribute the profit among its existing shareholders by providing them bonus shares. iii. Lenders normally lend in proportion to the amount of shareholders funds. Finance is required for a long period also. On the other hand, the holder of a conventional bond not only receives the face value of the bond at maturity but is also paid regular interests at the coupon rate over the life of the bond. 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. Financial institutions impose a penalty for defaults on the payment of installment of principal and/or interest. There is a lock-in period up to which no interest will be paid. Characterize by fluctuations in returns, iii. These funds are normally used for investing in projects that will generate synergies for the company in the future years. Debenture holders of an organization arc known as creditors. These loans carry at a floating rate of interest and predetermined maturity period. Lessee is free to cancel the lease in case of change of technology. Some of the long-term sources of finance are:- 1. (ii) Direct Negotiation Terms and conditions of such loans are directly negotiated between the borrower and the financial institution providing the loan. 3) Long-term Sources of finance. (ii) No Advantage of Trading on Equity If a Company issues only equity shares, it will be deprived of the benefits of trading on equity. vi. They are issued under the common seal of the company acknowledging the receipt of money. Preference Shares 3. Thus flexibility is not available in case of loans from financial institutions where the loans are repaid in instalments resulting in heavy burden in the earlier years of a project, whereas the project may actually generate substantial cash flows in later years. Besides asset security, the lender of the term loans imposes other restrictive covenants to the borrower depending upon the nature of the project and the financial condition of the borrowing company. Long-term funds are paid back during the lifetime of an organization. Therefore, they can get the right to control the affairs of the company. The government of India made several changes in the economic policy of the country in the early 1990s. From their standpoint, retained earnings are an attractive source of finance because investment projects can be undertaken without involving either the shareholders or any outsiders. The capital profits emerging out of retained earnings may be preferred because of taxation considerations. Non-Cumulative Preference Shares Refer to the shares for which dividends are not accumulated over a period of time. 3.4 Final accounts. Irredeemable Preference Shares Refer to the shares that are not paid during the existence of the organization. But, in case of companies It is faster than the companys equity or preference shares issue as there are fewer regulations to abide by and less complexity. At the end of the period of lease contract, the asset reverts back to the lessor, who is the legal owner of the asset. However, for obtaining further finance in case of any existing company, the management should, as far as possible, avoid issuing equity shares. Equity financing is the process of the sale of an ownership interest to various investors to raise funds for business objectives. The law treats them as shares but they have elements of both equity shares and debt. For this reason, they are also called hybrid financing instruments. The amount of long term capital depends upon the scale of business and nature of business. Sources of Long-Term Finance for a Company, Firm or Business, 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 p, Essays, Research Papers and Articles on Business Management, Raising of Finance for a Company: 12 Methods, Sources of Industrial Finance in India | Financial Management, Essay on the Sources of Business Finance | Finance | Financial Management, Human Resource Planning: Meaning, Objectives, Purpose, Importance and Process, Long-Term Sources of Finance Equity Shares, Preference Shares, Ploughing Back of Profits, Debentures, Financial Institutions and Lease Financing, Long-Term Sources of Finance Shares, Debentures and Term Loans, Long-Term Sources of Finance Equity Capital, Preference Capital, Debt Capital, Internal Sources and Foreign Capital. 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. iii. Depending on various factors, the period can stretch for more than 5 to 20 years. 3.6 Efficiency ratio analysis. The company's net worth can be calculated using two methods: the first is to subtract total liabilities from total assets, and the second is to add the company's share capital (both equity and preference) as well as reserves and surplus. Do not allow the interference of creditors, who have provided term loans to the organization, in the internal affairs of the organization. Sale of assets must be made with care to avoid taking losses or exposing the company to the risk of future losses. These can be sold with a long maturity of 25-30 years at a deep discount on the face value of debentures. However, prime basis on which a share is valued is the price at which it is expected to be sold. (iii) High Profitability Leasing business is highly profitable to the lessor because the rate of return is more than what the lessor pays on his borrowings. Long-term financing is a mode of financing that is offered for more than one year. Interest is paid every year and principal is paid on the date of maturity. Leasing is, thus, a device of long term source of finance. The payment of a portion of the unpaid balance of the loan is called a payment of principal. It is of vital significance for modern business which requires huge capital. Internal and external sources of finance (AO2) Short-term and long-term external sources of finance (AO1) The appropriateness of sources of finance for a given situation (AO3) 3.2 Costs and revenues. The sources are: 1. These shares carry a fixed rate of dividend and such dividend must be paid in full before the payment of any dividend on equity shares. Sources of Long-Term Finance for a Company, Firm or Business In simple terms, it means giving the asset on hire or rent. It involves financing for fixed capital required for investment in fixed Assets. In other words, a debenture is an agreement between a debenture holder and an organization, which acknowledges that the organization would repay the debt at a specified date to debenture holders. In case of any default in debenture interest payment, the debenture holders can sell the companys assets and recover their dues. In case of sole-proprietary concerns and partnership firms long term funds are generally provided by the owners themselves or by their retained profits. Dilution of control is an inherent characteristic of financing through issue of equity shares. The amount of dividend may vary from one financial year to another. The capital procured by issue of equity shares is a permanent source of funds to the company as it need not be redeemed during the lifetime of the company. The advantage of having internal accruals like depreciation and retained earnings is clearly seen in their characteristics. (c) The term loans are negotiable loans between the borrowers and lenders. (vi) Easy to Sell In comparison to investment in fixed properties, the investment in equity shares is much liquid because the shares can be sold in the market whenever needed. 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. (iii) No Real Control over the Company There are a number of shareholders and most of them are scattered and unorganised. As the legal owner, it is the lessor (and not the lessee), who will be entitled to claim depreciation on the leased asset. Here we discuss the two types of external sources of finance: long-term financing (equity, debentures, term loans, preferred stocks, venture capital) and short-term financing (bank overdraft and short-term loans). (f) The burden of periodic installments in term loans brings in a discipline in the management for better management of cash flows and other operations. Australia and China have adopted more assertive strategies for security cooperation with Pacific countries during the previous year, with significant efforts concentrated on the Solomon Islands, reported Financial Post. The interests of the debenture holders are protected by a trustee (generally bank or an insurance company or a firm of attorneys). Limiting the liability of equity shareholders to the amount of shares they hold, iv. The interest on term loans is a definite obligation that is payable irrespective of the financial condition of the firm. Internal Sources 10. Ploughing Back of Profits 4. 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