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
Sources of long term finance
The main sources of long term finance are as follows:
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.
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.
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
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