A business or organization, to keep running for long duration needs some sources of finance permanently. Long term sources of finance are those, which remains with the business for a longer duration of time. The main advantage is that it is not been paid immediately or within shorter time duration. Business need to repay those long-term sources of finance after many many years. There are numerous people who wish to put their resources into a new company in the event that they like the ideas, growth model or might be demanding sector. Whereas on the other side companies requires fund for various operations and financial requirements. There are various financing options created to match the demand and supply based on the different criteria of the individual who wish to invest their funds in an organization.
Long Term Sources of Finance:
They are further divided into 2 categories i.e.. internal long-term sources of finance and external long-term sources of finance. Let us understand this in more detail below:
External Long Term Sources of Finance:
You can check below some of the external long term sources of finance which might be a good option for your business or your organization.
1. Equity Share Capital:
It is the main sources of finance, which any organization would look before beginning the business. Equity share capital is the best alternative when looking for permanent sources of capital. It expresses the ownership rights of an organization. A public company may raise assets or funds from promoters, investors or individuals by issuing common equity shares of a company. These shareholders / investors are paid dividends just when there are distributable earnings. The risk of value investors is restricted up to the worth of the shares face value.
2. Preference Share Capital:
Those individuals who are more keen towards payment of dividends at regular intervals rather than appreciation of capital value. In case of liquidation, preference shareholders are paid initially and then equity shareholders are been paid. Long term sources of funds from preference shares are raised by offering public issue of shares. It does not require any security as well as they do not have ownership privilege in an organization. It has a few attributes of debt capital as well as some of equity capital. There are different types of preference share capital issued by a company as a long term sources of finance, they are:
- Convertible Preference Shares.
- Non-convertible Preference Shares.
- Non-participating Preference Shares.
- Participating Preference Shares.
- Non-participating Preference Shares.
- Redeemable Preference Shares.
- Irredeemable Preference Shares.
- Cumulative Preference Shares.
- Non-cumulative Preference Shares.
3. Loans from Financial Institutions:
When the firm either takes loan / finance from banks or from non-banking financial institutions which are repayable following 3, 5 or under 10 years then it is represented as long term sources of finance. Financial Institutions give long-term loans for financial needs to private as well as public firms. For the most part company’s get long-term sources of finance by raising term loans. Below are some of the financial institutions that provides such types of term loans, they are: Nationalized Commercial Banks.
- Development Banks.
- Government Financial Institutions.
- Other Investment Organizations.
A debenture is a debt record of declaration with a typical seal of an organization. It contains terms and conditions of debt repayment, rate of interest payments, redemption / maturity of debt and more and the information related to security offered by an organization. There are various different types of debentures issued by a company for long term sources of finance, they are:
- Secured or Mortgage Debenture.
- Simple or Naked Debentures.
- Bearer Debentures.
- Convertible Debentures.
- Non-Convertible Debentures.
- Redeemable Debentures.
- Registered Debentures.
- Irredeemable Debentures.
- Right Debentures
Internal Long Term Sources of Finance:
Below are some of the internal long term sources of finance which you can think of when you are looking around for sources of financing options.
5. Retained Earnings:
That income which the organization has accumulated throughout the years and in this manner, it tends to be known as reserve funds of the organization. These undistributed profits kept as a reserve fund are then utilized by the organization at specific point for specified purpose. For example: business expansion, investing in research of new products, diversification programmes etc. In spite of the fact, it is one of the essential methods for long term sources of finance mostly for improvement, development or expansion of an organization.
Here we have seen various different types of long term sources of finance. One should analysis these types carefully before selecting or making your decision. As all these types have its unique characteristics with respect to dilution of ownership, requirement of any pledge or mortgage, cheapest method, liquidation rights, privilege of dividends and more. Check it out.
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