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Long Term Financing

Long term sources of finance include equity capital, preference capital, internal accruals, term loans, debentures, and foreign sources. Equity capital provides ownership but dilutes control, while debt financing like loans and debentures provide capital without diluting ownership but carry repayment risk. Internal sources like retained earnings do not dilute ownership but are limited in amount. The appropriate sources of long term finance depend on factors like the nature of business, assets, and technology used.

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166 views29 pages

Long Term Financing

Long term sources of finance include equity capital, preference capital, internal accruals, term loans, debentures, and foreign sources. Equity capital provides ownership but dilutes control, while debt financing like loans and debentures provide capital without diluting ownership but carry repayment risk. Internal sources like retained earnings do not dilute ownership but are limited in amount. The appropriate sources of long term finance depend on factors like the nature of business, assets, and technology used.

Uploaded by

Amala Kalathi
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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SOURCES OF LONG TERM

FINANCE
• Finance is the life blood of a business

Sources of finance:-

• Short term sources


 
• Long term sources
Purpose of long term finance:-

• To finance fixed assets

• To finance the permanent part of working capital

• To finance the growth and expansion of a business


 
Factors determining long term sources of
finance:-

• Nature of business

• Nature of goods produced

• Technology used
EQUITY CAPITAL

TERMS:

 Authorized, Issued, Subscribed & Paid- up Capital.

 Par/ face Value, Issue Price, Book Value, Market


Value.
Rights Of Equity Share Holders:

 Right to Income

Right to Control

 Pre – emptive Right

Right in Liquidation
EQUITY CAPITAL
PREFERENCE CAPITAL

• Hybrid form of Financing


• Equity Features:
-out of distributable profits
-dividends not tax deductible
-Priority over Equity shares in case of bankruptcy

• Debenture features:
-dividend rate is fixed
-capital is redeemable
-normally no right to vote
PREFERENCE CAPITAL
Retained Earnings Depreciation
INTERNAL ACCRUALS
• TERM LOANS

• Maturities
• Security
• Provided by Foreign Institutes/ Bank
• Repayment schedule
• Restrictive Covenants
• Convertibility
Term Loan Contd…
DEBENTURES

• Interest
• Security
• Maturity & Redemption
• Options
• Convertibility
Few types of Debenture

• Non – convertible debentures

• Fully convertible debentures

• Partly – convertible debentures


Debentures Contd…
Other Important Sources of financing

• Leasing
• Hire Purchase
• Asset Securitization
• Government Subsidies
• Lottery funding
• Selling asset
• Convertible bonds eg:British Airways has
announced that it is to raise £300m of new funding via a convertible bond issue, as part of a
£600m refinancing.
Foreign Sources

• Foreign Collaborators

• International Financial Institutions:

• Non-Resident Indians
Comparison of Various sources of Long – term Financing

Cost Dilution of Risk Restraint on


Control managerial
freedom

Equity High Yes Nil No


Capital
Retained High No Nil No
Earning
Preference High No Negligible No
Capital
Term Loans Low No High Moderate

Debentures Low No High Some


BENEFITS OF LONG TERM
FINANCING
Raising Long Term Finance

• Initial Public offering


• Right Issue
• Private Placement
• Preferential Allotment
• Obtaining a Term Loan
• Venture Capital
Initial Public Offering

• Decision to go Public
• Benefits
• Cost
• Eligibility
• Book Building process
Right Issue

• Issue of capital to existing shareholders


• Offer made on pro rata basis
• Right shares are tradable, may be sold in open market.
• Comparison with Public issue: familiar investors,
hence likely to be more successful
• Less floatation costs
• Lower pricing to benefit shareholders
Private Placement

• Sale of securities directly to wholesale investors like FIs,


banks, MFs, FIIs, PE funds etc.(QIP’s)
• Called private placement in equity/equity related instruments,
in unlisted companies and in all cases of debt
• Called preferential allotment in case of unlisted companies
for equity/equity related instruments
• Different from reservations made for such QIBs out of a
public issue
• Subject to SEBI regulations on pricing, lock in period, open
offer to be made to public
• QIB placement guidelines recently issued by SEBI for
compliance and disclosures
Obtaining a term loan

• Submission of loan application


• Initial processing of loan application
• Project Appraisal
• Issue of Letter of Sanction
• Acceptance of terms and conditions by the borrowing
unit
• Execution of loan agreement
• Disbursement of loan
• Creation of security
• Monitoring
Venture Capital

• Equity Participation

• Long term investment

• Participation in management
Conclusion
• During the research of this assignment we have
concluded that
• many type of finance can be used at one particular
time.
• Depending on the type of company and they should
try to get the best possible finance deal
• to save the borrower on the risk of borrowing high
amount and
• also to pay high amount on the interest rate.
THANK U..!!!

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