(iii) Increase in Market Value Usually a portion of the profits is ploughed back into the business which results in enhanced earning power of the company and increase in the market value of its shares. Failure to meet these payments raises a question mark on the liquidity position of the borrower and its existence may be at stake. When the organization has sufficient profit, the accumulated dividend of these preference shares is paid. The disadvantages of debentures are as follows: i. Compel an organization to pay interest even if there is no profit or loss. Equity warrant is generally attached to non-convertible debentures as a sweetener to improve their marketability. The term loans may be converted into equity at the option and according to the terms and conditions laid down by the financial institutions. Debt Capital 9. Internal sources of finance come from inside the business, meanwhile, external sources of finance come from outside the business. Help in raising more funds as they are less risky, ii. It may come from different sources such as equity, debt, hybrid instruments, or internally generated retained earnings. The rate of dividend on these shares is not fixed and depends upon the availability of divisible profits and the intention of the directors. 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. Generally, equity shares are repaid at the time of winding up of an organization. Provide right to equity shareholders to share profit, assets, and control of the management. A company does not generally distribute all its earnings amongst its shareholders as dividends. (v) Right Shares Equity shareholders are entitled to get right shares whenever the company issues new shares. His position is akin to that of a person who uses the asset with borrowed money. Restrictive covenants are binding legal obligations written in the loan agreement to safeguard the interest of the lender. (v) Increase in the Credit Worthiness of the Company Since the company need not depend upon outside sources for its financial needs; it increases the credit worthiness of the company. As stated earlier, in case of sole proprietary concerns and partnership firms, long-term funds are generally provided by the owners themselves and by the retained profits. The subscription price at which the right shares are offered to them is generally much below the shares current market price. On Tuesday . Dividends refer to the portion of business earnings paid to the shareholders as gratitude for investing in the companys equity. Examples of Long-term Sources of finance Equity Share Capital The lessee is free to choose the asset according to his requirements and the lessor is actually the financier. (a) The terms and conditions of term loans are negotiable between borrowers and lenders and as a result, it may sometimes affect the interest of lenders. When a company does not distribute whole of its profits as dividend but reinvests a part of it in the business, it is known as ploughing back of profits or retention of earnings. Their features, types, advantages and limitations are discussed in the following paragraphs: In some markets the two terms, debentures and bonds are used synonymously, but in the US they refer to two separate kinds of debt-based securities. But in case of Companies whose financial . There are different vehicles through which long-term and short-term financing is made available. (vii) No Effect on Debt-Equity Ratio Lease is considered a hidden form of debt because neither the leased asset nor the lease liability is depicted on the balance sheet. ii. Debentures 5. (c) The term loans are negotiable loans between the borrowers and lenders. Let us start the discussion with the equity shares. Internal Sources 10. A holder of a zero-coupon bond does not receive any coupon or interest payments. (b) Interest payable on term loan is tax deductible expenditure and thus tax benefit becomes available on interest that renders the cost of debt cheap. Zero-coupon bondholders gain on the difference between what they pay for the bond and the amount they will receive at maturity. ii. Disclaimer 8. These shares do not carry any preferential or special rights in respect of annual dividends and in the repayment of capital at the time of liquidation of the company. At the same time, shareholders may get back money from the sale of shares in the stock exchanges. Expenditure on fixed assets such as plant, machinery, land and buildings are funded by long term finance. Non-Convertible Debentures Refer to the debentures that have no right to get converted into the equity shares during their maturity period. They are issued under the common seal of the company acknowledging the receipt of money. Depending on various factors, the period can stretch for more than 5 to 20 years. Since, both debenture and term loan are a type of debt financing, they share basic characteristics of a debt and hence their pros and cons are also similar. Following points explain the type of debentures in brief: i. 19.2 Objectives. (iii) Not Bound to Pay Dividend A company is not legally bound to pay dividend to its equity shareholders. (d) Since term loans do not represent debt financing, neither the control nor the profit sharing of the equity shareholders is diluted. According to Section 2 (30) of the Companies Act, 2013, the term debenture includes debenture stock, bonds and any other securities of a company whether constituting a charge on the assets of the company or not.. Finance is required for a long period also. 3) Apple raises $6.5 billion in debt via bonds. (i) Costly Source of Finance Lease financing is a costly source of finance for the lessee because lease rentals include a profit margin for the lessor as also the cost of risk of obsolescence. (f) The less debt the company has, the more attractive it is to potential investors and buyers. Covenants may also include the appointment of nominee director by financial institutions to safeguard their interests. Do not allow debenture holders to vote in the official meetings of the organization and influence the decision. Higher amount of shareholders funds provides higher safety to the lenders. An additional disadvantage from borrowers viewpoint is that the loan contracts contain certain restrictive covenants which restrict the managerial freedom. Longterm sources of finance have a long term impact on the business. Lease financing, therefore, does not affect the debt raising capacity of the enterprise. These sources are particularly important for small businesses which may find it difficult to get external finance. When companies are considering new investments, they may compare available sources of finance to determine which would be most appropriate for a new endeavor. Dilution of control is an inherent characteristic of financing through issue of equity shares. A new company can raise finance only from external sources such as shares, debentures, loans etc. SBA 7 (a) loans, for example, range from $25,000 . The sources from which a finance manager can raise long-term funds are discussed below: 1. A long-term target for many Premier League clubs, Koulibaly joined Chelsea on a four-year contract and was seen as a ready-made solution after centre-backs Antonio Rudiger and Andreas Christensen . Features of Long-term Sources of Finance - It involves financing for fixed capital required for investment in fixed Assets It is obtained from Capital market At the end of lease period, the lessee is usually given an option to buy or further renew the lease contract for a definite period. The amount of long-term finance needed for buying Fixed Assets, or Non-Current Assets, with a relatively low value such as vehicles will be small. vi. Medium term finance One to three years. Interest is paid every year and principal is paid on the date of maturity. The control of the company may change to new shareholders who may reap the benefits of the companys prosperity and progress. There are term lending institutions sponsored by governments or reputed banks. (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. The advantage of having internal accruals like depreciation and retained earnings is clearly seen in their characteristics. They have voting rights to elect directors of the company and the directors control the business. 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. At the time of liquidation, these shares are paid after paying all the liabilities. (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. (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. 3.5 Profitability and liquidity ratio analysis. Debt financing is beneficial only if the internal rate of return of the concern is greater than its cost of capital; otherwise it adversely affects the shareholders. Discounts and premiums on shares are calculated from their par value or face value. 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. (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. Here, we discuss the top 5 sources of long-term financing, examples, advantages, and disadvantages. In USA there is a distinction between debentures and bonds. (i) Additional Source of Finance Leasing facilitates the use of assets without making any immediate payment. Foreign Capital. The equity shareholders collectively own the company and enjoy all the rewards and the risks associated with the ownership. 7 Major Sources of Long -Term Finance Article shared by : ADVERTISEMENTS: This article throws light upon the seven major sources of long-term finance. The law treats them as shares but they have elements of both equity shares and debt. Such short-term sources of working capital help in assisting the seasonal fluctuations and short-term liquidity crisis. Capital expenditures in fixed assets like plant and machinery, land and building, etc of business are funded using long-term sources of finance. Long term finance are capital requirements for a period of more than 1 year. In return, investors are compensated with an interest income for being a creditor to the issuer. The decrease in the size of the interest payment is matched by an increase in the size of the principal payment so that the size of the total loan payment remains constant over the maturity period of the loan. Lease Financing 7. Irredeemable Debentures Refer to the debentures that are not paid back during the lifetime of an organization. The holder of a zero-coupon bond only receives the face value of the bond at maturity. iii. Term loans, also referred to as term finance, represent a source of debt finance, which is generally repayable in less than 10 years. (iii) Helpful in Following a Balanced Dividend Policy Such a company can follow the policy of paying regular and balanced dividends because it can use retained earnings for paying dividends in the years when there are inadequate profits. 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. Funds required for a business may be classified as long term and short term. Australia concerned over long-term Chinese security presence in Solomon islands. 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. (ii) Direct Negotiation Terms and conditions of such loans are directly negotiated between the borrower and the financial institution providing the loan. This source of finance does not cost the business, as there are no interest charges. There are two types of shares, namely equity and preference, issued by an organization. (i) Right to Control Equity shareholders are the real owners of the company. The advantages and disadvantages of term loans from the lenders and borrowers point of view are discussed below: (a) Term loans are provided by banks and other financial institutions against security because of which the term loans are secured. These various sources are described below. The capital profits emerging out of retained earnings may be preferred because of taxation considerations. The ever growing financial requirements of the corporate sector have resulted in an intense competition between them to corner investors funds. Internal sources of finance examples These are issued for a fixed period of time. iii. Help in maintaining good relation with financial institutions, iii. The characteristics of term loans are as follows: i. This residual income is either directly distributed to them in the form of dividend or indirectly in the form of bonus shares. As a result, the lender has a regular and steady income. Hence, improving the companys credit rating might help the organizations raise long-term funds at a much cheaper rate. 19.1 Introduction As we are aware, finance is the life blood of business and is of vital significance for modern business which requires huge capital. These funds may be used to finance the cost of acquisition of fixed assets that are needed for expansion, modernization and diversification programmes of the company. Debentures are offered to the public for subscription in the same way as for issue of equity shares. Sources of Long-Term Finance for a Company, Firm or Business (v) Convertibility Financial institutions usually insist on the option of converting their loans into equity shares of the company. They do not carry voting rights and are secured against the companys assets. It is required by an organization during the establishment, expansion, technological innovation, and research and development. 3.4 Final accounts. (iii) Creation of Monopolies Continuous ploughing back of profits over a long time may lead a company to grow into a monopoly. Long-term funds are paid back during the lifetime of an organization. Preference Shares 3. In other words, bonus shares are issued when an organization has sufficient profit but is in need of more working capital at that particular time. (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. (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. Public Deposits 4. 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. Lease is a contract between the owner of an asset and the user of such asset. (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. Depending upon the intrinsic value of shares, the market value fluctuates. When businesses need to use the money in the long term (more than five years), this creates the need for long-term finance. 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. (Nickels, McHugh, McHugh, N.D.) Long-Term Finance iv. 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. However, they may be rescheduled to enable corporate borrowers to tide over temporary financial exigencies. Tax liability on dividends differs in different zones, states, and countries. The less the firm relies on external sources of funding, more is the retention of the ownership of the firm. Share capital or Equity shares Issuing bonus shares is beneficial for both the organization as well as the shareholders. These are foreign direct investment, foreign portfolio investment and foreign commercial borrowings. The value of shares is calculated according to various principles in different capital markets. Make it difficult for an organization to provide security against debentures if an organization has insufficient fixed assets. Long term Sources of Finance Long-term Financing involves long-term debts and financial obligations on a business which last for a period of more than a year, usually 5 to 10 years. Whenever an organization has accumulated surplus profit, it may distribute the profit among its existing shareholders by providing them bonus shares. The organization has to pay dividends on these preference shares at the end of financial year. You can learn more about excel modeling from the following articles: . The volatility of markets is a major factor that should be considered to determine the price of a share in the market at a particular point of time. In a rising economy with increasing inflation, the effective cost of future installments decreases due to reduction in the value of the currency. Lower debt improves a companys debt capacity and creditworthiness, as well. Hence, a group of shareholders may control the company by purchasing shares and they may use such control for their personal advantage at the cost of companys interests. However, term loan providers are considered as the creditors of the organization. (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. Debentures refer to long-term debt instruments issued by a government or corporation to meet its financial requirements. Preference Shares 3. Characterize by fluctuations in returns, iii. (iv) Ownership Dilution If the new shares are issued to the public, it may dilute the ownership and control of the existing shareholders. It is a standard clause of the bond contracts and loan agreements. 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. IPO is a means of raising capital for companies by allowing them to trade their shares on the stock exchange. (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. Do not allow the interference of creditors, who have provided term loans to the organization, in the internal affairs of the organization. Suppose a company wants to raise money via NCD from the general public. Result in overcapitalization if more than required equity shares are issued. Long-term sources are those sources that are required to be Re-paid after 5 years. Serve as a source of long-term capital and are repaid during the lifetime of the organization. These shares are a kind of award for employees for the work rendered by them to organization. The debentures that have no right to equity shareholders are entitled to get right shares whenever company. 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