Sources of Long-Term Finance

Sources-of-Long-Term-Finance
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Long-term finance can be a helpful business tool.  It is capital financing that typically lasts over a number of years and is available to companies that want to develop and sustain a more stable cash flow.

Long-term debt refers to loans that have terms lasting longer than one year and are typically repaid over a defined period of time, such as five years or ten years. Long-term debt can also include bonds issued by governments, corporations and non-profit organizations, as well as commercial paper (short-term loans) sold by banks for their own use rather than being handed over to depositors.

Some of the long-term sources of finance are:-

  • Preference Shares
  • Equity Shares
  • Debentures
  • Term Loans
  • Financial Institutions
  • Lease Financing
  • Internal Sources
  • Debt Capital
  • Ploughing Back of Profits
  • Foreign Capital

 

Equity Loans

Equity-Shares are a new type of investment that allows you to invest in a company, but with the added benefit of owning equity in the company. Instead of buying stock in a company, you own shares in that company—and if the company goes bankrupt and liquidates, your shares will be worth nothing.

The best way to think about it is like this: You’re buying into an idea and buying into someone’s opinion. The person who owns the idea has made promises about how much they’ll pay you back when they make money, how much they’ll pay for you if their business fails, and what percentage of their success will go back into their company for reinvestment.

This means that if your business does well and grows over time, your share price will also rise! That means more money for you! And if your business fails or stagnates? Well… at least there’s no risk involved!

Debentures

Debentures are one of the most popular forms of financial instruments. They are usually issued by a company and have a fixed interest rate, which means that it is not affected by fluctuations in the economy. They can be used for long-term investments, such as buying real estate or bonds that are expected to increase in value over time. They are also used for short-term investments, such as purchasing shares in companies or banks.

Debentures come with several benefits over other financial instruments, including better liquidity, flexibility, and protection against inflation.

Term Loans

A term loan is a loan that has a fixed repayment period or timeline, often between five and ten years. Term loans are typically used to finance major projects or capital expenditures, like equipment purchases and renovations. They’re also great for short-term liquidity needs, like paying off existing debt before it becomes due.

Preference Shares

An additional option of long-term funding for a business is preference share capital. They’re an investment in the company’s future, and you have the chance to be rewarded for it. As their name implies, these shares are preferred over equity shares regarding dividend payments and capital returns. These shares have a fixed dividend rate, which is paid in full on equity shares.

Loans from Financial Institutions

Financial Institutions are also a crucial source of long-term finance. Various financial institution has been founded by Government in India at the state and national level to offer long-term and medium-term loans to industrial undertakings.

Financial institutions that are established at the national level are the Industrial Development Bank of India (IDBI), Industrial Credit and Investment Corporation of India (ICICI), Industrial Finance Corporation of India (IFCI), Life Insurance Corporation of India (LIC), Unit Trust of India (UTI), General Insurance Corporation (GIC), Industrial Reconstruction Corporation of India (IRCI),etc.

Financial institutions that are established at the state level are State Industrial Development Corporations (SIDCs) and State Financial Corporations (SFCs). To exemplify, In Haryana, Haryana State Industrial Development Corporation (HSIDC and Haryana State Financial Corporation (HFC) have been established.

Lease Financing

A lease is a legal agreement between an asset’s owner and its user. The user is referred to as the “Lessee,” and the asset’s owner as the “Lessor.” According to the terms of the lease agreement, the asset’s owner gives up the right to utilize the asset to a third party for the agreed time period for an agreed consideration known as lease rental.

Lease financing is a good option if you don’t have enough cash to buy a car outright. It also helps if you want to be able to return the vehicle without having to pay for it. However, some people think that lease financing is too expensive because it makes them responsible for keeping up with their payments and paying off the loan over time instead of paying it all at once.

To put it another way, the amount of profitability after taxes, the size of dividend payments, and the amount of allowed depreciation, reserves, and excess are all factors that affect the sources of internal funds.

Internal Sources of Finance

Internal sources of finance are funds that your company receives from within itself. This can include money the company raises through stock or bond sales or any other method of raising capital that doesn’t involve borrowing. These sources are crucial for small enterprises that may have trouble obtaining outside financing.

Debt capital

Debt capital is a type of loan that helps you finance your business. It’s one of the most common types of financing, and it can be used to help companies with their debt obligations, such as mortgages and credit cards.

It includes term loans and debentures. Debentures typically have set interest rates and maturity dates. Every year, interest is paid, and the principal is returned on maturity. Payments for term loans are made in instalments that include principal and interest at a fixed rate of interest.

Ploughing back profits

It is a way to make your business more profitable. You use this money to grow your company or organization further when you plough back profits. You can use it to cover the debt, pay off investors, or give stock options to employees.

When you plough back profits, you take money from one source and put it into another. For example, if your business earns $100,000 per year but pays its expenses with $50,000 in cash flow, then the remaining $50,000 would be considered “ploughed back” because it is not being used for operations or paying down debt.

Foreign capital

It is a term that refers to money invested in an entity by individuals or corporations outside of the country where the entity is based. This can be done through direct investments in stocks, bonds, or real estate. Foreign capital may also be invested indirectly through a local subsidiary or affiliate of a foreign company.

Early in the 1990s, the Indian government changed the nation’s economic policies in a number of ways. In addition to increasing the inflow of foreign capital into the nation, this resulted in the deregulation as well as liberalization of the Indian economy. Foreign capital may be provided by institutions, foreign governments, banks, individual investors, or business corporations.

The numerous types of foreign capital that are streaming into India have significantly boosted its economy. These include foreign commercial borrowings, overseas portfolios, and foreign direct investments.

We hope you like this informative article! For any queries, feel free to contact us.

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