long term finance sourceslong term finance sources

Term Loans 8. 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. The trustee is responsible for ensuring that the borrowing company fulfills the contractual obligations mentioned in the contract. Cookies help us provide, protect and improve our products and services. The firms that choose to finance through the external sources can retain internal funds to cover the company in an emergency. Equity shareholders are considered as the real owners of the organization. (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. There are different vehicles through which long-term and short-term financing is made available. They are entitled to dividends after paying the preference dividends. The organization has to pay dividends on these preference shares at the end of financial year. This chapter deals with the major vehicles of both types of financing. The advantages of preference shares are as follows: i. iv. Debt capital includes debentures and term loans. Funds required for a business may be classified as long term and short term. The borrowing company needs to follow a repayment schedule for paying back the term loan to the financial institution. As is obvious, long-term financing is more expensive as compared to short-term financing. (ii) Increase in the Borrowing Capacity The equity capital increases the companys shareholders funds. Lease financing, therefore, does not affect the debt raising capacity of the enterprise. 3.3 Break-even analysis. Most of the new instruments are simply old conventional instruments with some added features. Ploughing back of profits is made by transferring a part of after tax profits to various reserves such as General Reserve, Reserve Fund, Replacement Fund, Dividend Equalisation Fund etc. (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. Public Deposits 4. Preference shares give preferential rights to their holders in comparison to equity shares. The right of lenders to appoint nominee directors on the board of the borrowing company may further restrict the managerial freedom. Provide low returns to preference shareholders, ii. In this lesson, you will learn about various sources of long term finance and the advantages and disadvantages of each source. Short term 2. Financial institutions impose a penalty for defaults on the payment of installment of principal and/or interest. (c) They do not dilute the ownership of the company. In return, investors are compensated with an interest income for being a creditor to the issuer. Do not allow the interference of creditors, who have provided term loans to the organization, in the internal affairs of the organization. The long term sources of finance are shown below: 1. Financial institutions established at the national level include Industrial Development Bank of India (IDBI), Industrial Finance Corporation of India (IFCI), Industrial Credit and Investment Corporation of India (ICICI), Industrial Reconstruction Corporation of India (IRCI), Unit Trust of India (UTI), Life Insurance Corporation of India (LIC), General Insurance Corporation (GIC) etc. An equity investor is that person or entity who contributes a certain sum to public or private companies for a specific period to obtain financial gains in the form of capital appreciation, dividend payouts, stock value appraisal, etc. Loans from co-operatives 1. Do not provide any voting rights to preference shareholders, iv. 4) Paytm to raise funds via selling a significant controlling stake in the company to Warren Buffet for $10-$12 billion. 2) Amazon raised $54 million via the IPO route to meet the long-term funding needs of the company in 1997. Account Disable 12. The sources of long-term finance refer to the institutions or agencies from, or through which finance for a long period can be procured. Bearer Debentures Refer to the debentures that are not registered in the books of the organization. The rate of dividend on these shares is not fixed and depends upon the availability of divisible profits and the intention of the directors. 3.5 Profitability and liquidity ratio analysis. Long term finance are capital requirements for a period of more than 1 year. If retained profits do not result in higher profits then there is an argument that shareholders could make better returns by having the cash for themselves. A list of sources of long term financing looks something like this: Equity shares (i) Irregular Dividend Dividend paid on equity shares is neither regular nor at a fixed rate. Some of the long-term sources of finance are:- 1. Content Guidelines 2. Term Loans 8. Make it difficult to repay funds raised by issuing equity shares during the lifetime of an organization, even if these funds are not in use. ii. 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. These are foreign direct investment, foreign portfolio investment and foreign commercial borrowings. In addition, long-term financing is required to finance long-term investment projects. Equity shares have many advantages but it also have some disadvantages. The interests of the debenture holders are protected by a trustee (generally bank or an insurance company or a firm of attorneys). Capital expenditures in fixed assets like plant and machinery, land and building, etc of business are funded using long-term sources of finance. Is a loan taken from the public by issuing debentureIssuing DebentureDebentures refer to long-term debt instruments issued by a government or corporation to meet its financial requirements. iii. It is obtained from Capital market. The term loan agreement is a contract between the borrowing organization and lender financial institution. The characteristics of preference shares are as follows: i. Expenditure on fixed assets such as plant, machinery, land and buildings are funded by long term finance. The fundamental principle of long-term finances is to finance the strategic capital projects of the company or to expand the companys business operations. However, prime basis on which a share is valued is the price at which it is expected to be sold. Interest is computed on the amount of the unpaid balance of the loan at each payment period. This has been a guide to what external sources of finance are. 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. (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. Dividends are paid out of post-tax profits. More long-term funds may not benefit the company as it affects the ALM position significantly. Although depreciation is meant for replacement of particular assets but generally it creates a pool of funds which are available with a company to finance its working capital requirements and sometimes for acquisition of new assets including replacement of worn out plant and machinery. Examples of Long-term Sources of finance Equity Share Capital Report a Violation 11. 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. Internal finance includes the funds generated within the corporate unit irrespective of the nature of source. There is a lock-in period up to which no interest will be paid. The foreign capital may be provided by foreign government, institutions, banks, business corporations or individual investors. Hence they are unable to exercise effective and real control over the company. Earlier all equity shares had equal voting rights. (ii) Simplicity Borrowing from banks and financial institutions involve time consuming and complicated procedures whereas a leasing contract is simple to negotiate and free from cumbersome procedures. 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. These shares are a kind of award for employees for the work rendered by them to organization. Raising funds through equity shares for long-term investment as these shares are repaid during the lifetime of the organization, iii. However, there are certain disadvantages of using internal accruals as a source of finance. 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. The term loans carry a fixed rate of interest, but this rate is negotiated between the borrowers and lenders at the time of disbursing of loan. The companys credit rating also plays a major role in raising funds via long-term or short-term means. Borrowing for long-term means that the business does not expect to repay this debt in less than five years. Restrictive covenants are binding legal obligations written in the loan agreement to safeguard the interest of the lender. 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. IPO is a means of raising capital for companies by allowing them to trade their shares on the stock exchange. The holders of convertible preference shares have to pay conversion price at a given date for converting their shares into equity shares. This can include real estate, patents, works of art, and other assets controlled by the company. Long term sources of finance are those, which remains with the business for a longer duration of time. The less the firm relies on external sources of funding, more is the retention of the ownership of the firm. The sources are: 1. (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. Copyright 10. Short-Term Sources of Finance Short-term sources of funds: Money acquired must be paid back within one year. Equity capital represents the ownership capital. Long Term Source of Finance - This long term fund is utilized for more than five years. However, the use of internal accruals as opposed to new shares or debentures avoids costs that are associated with fresh issues. iv. Therefore, it has become essential for the issuer to innovate and introduce new financial instruments to cater to the different needs of the issuers and investors. Instruments with some added features long-term means that the borrowing organization and lender financial institution not fixed depends! 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