Long Term Finance
Finance is an important for any
business to carry out their operations effectively. There are two types of
Finance required in a business. They are Short Term Finance and Long Term
Finance. Today let us discuss about the Long Term Finance and its sources to
raise the fund for the business.
Firstly
let us know what does Long term Finance means?
Long term finance means finance
required for a business for more than one year period is called Long term
Finance. Long term finance is usually required by a business for expansion, modernization,
diversification, research and development.
Sources of Long Term Finance
Now let us see the various sources of Long
Term Capital
§ Equity Capital
§ Preference Capital
§ Debentures
§ Internal Accruals
§ Term Loans
Now let us
understand the Sources of Long term finance in detail
§ Equity Capital
Equity Capital
can be raised by issuing equity shares. Equity Capital represents the ownership
capital of a firm who enjoys the rewards and bears the risk of ownership.
However the liability of the equity shareholders is limited to their capital
contribution. Equity shareholders income is what left after satisfying all the
other investors i.e. Profit after tax minus preference dividend. The income of equity shareholders is maybe
retained by shareholders or paid out as dividends. The major reason why
earnings of equity shareholders is retained in the firm is to maximize the
market value of the equity shareholders.
§ Preference Capital
Preference
Capital is the hybrid form of financing. It shows characteristics of both
equity and debentures. The dividends of preference shareholders is usually
fixed rate. As the name itself suggest preference share it has preferential
rights over equity shares. Preference Capital can be raised by issuing preference
shares.
§ Debentures
For many large
firms debentures is one of the source for raising fund. Debentures holders are
called creditors to the company. The debenture holders are paid out a fixed
source of interest rate. They provide more flexibility than term loans because the offer huge variety of choices in
maturity, interest rate, security, repayment and other features. Debenture
Capital is raised by issuing debentures.
§ Internal Accruals
Internal
Accruals consists of depreciation charges and the retained earnings.
Depreciation charges comes from the depreciation of plant and machinery of each
year. And retained earnings comes from the income scarified by the equity
shareholders and it is called internal equity. Usually companies retain 30%-80%
of earning after tax for financing activities.
§ Term Loan
Earlier the loans provided by the financial
institutions or banks are the sole source for raising long term debt capital.
Term loans are referred to that debt finance which usually repayable within 10
years. The main objective of raising term loans is to finance acquisition of
fixed assets, working capital.
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