LONG TERM FINANCING

Long-Term Financing

Capital extended for a term of greater than a year. In both investing and personal finance, long-term financing often takes the form of a loan with a payback period of longer than one year. Examples of long-term financing include a 30 year mortgage or a 10-year Treasury note. Equity is another form of long-term financing, such as when a company issues stock to raise capital for a new project.

 Long Term Finance – Its meaning and purpose

A business requires funds to purchase fixed assets like land and building,

plant and machinery, furniture etc. These assets may be regarded as the

foundation of a business. The capital required for these assets is called

fixed capital. A part of the working capital is also of a permanent nature.

Funds required for this part of the working capital and for fixed capital

is called long term finance.

Purpose of long term finance:

To Finance fixed assets :

To finance the permanent part of working capital:

 To finance growth and expansion of business:

Factors determining long-term financial requirements :

Nature of Business

 Nature of goods produced

 Technology used

 Sources of long term finance

The main sources of long term finance are as follows:

 Shares:

These are issued to the general public. These may be of two types:

(i) Equity and (ii) Preference. The holders of shares are the owners

of the business.

 Debentures:

These are also issued to the general public. The holders of

debentures are the creditors of the company.

 Public Deposits :

General public also like to deposit their savings with a popular and well established company which can pay interest periodically and pay-back the deposit when due.

 Retained earnings

 The company may not distribute the whole of its profits among its

shareholders. It may retain a part of the profits and utilize it as

capital.

 Term loans from banks:

Many industrial development banks, cooperative banks and

commercial banks grant medium term loans for a period of three

to five years.

 Loan from financial institutions:

There are many specialised financial institutions established by

the Central and State governments which give long term loans at