Monday, 26 November 2012

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