Equity warrant is generally attached to non-convertible debentures as a sweetener to improve their marketability. The companys management needs to be assured about creating a mix of short-term and long-term financing sources. In addition, they can be issued at discount, par, and premium. It is of vital significance for modern business which requires huge capital. In case of sole-proprietary concerns and partnership firms long term funds are generally provided by the owners themselves or by their retained profits. It is usually done for big projects, financing, and company expansion. Irredeemable Debentures Refer to the debentures that are not paid back during the lifetime of an organization. These are foreign direct investment, foreign portfolio investment and foreign commercial borrowings. This article shall discuss major sources of long-term debt financing for most corporations. Debentures are usually secured by a charge on the immovable properties of the company. (b) It is obligatory on the part of the borrower to pay the interest and repayment of principal irrespective of its financial position. As the foreign capital plays a constructive role in a countrys economic development, it has led to a progressive reduction in regulations and restraints that had earlier inhibited the inflow of foreign capital. Term loans differ from short-term loans which are employed to finance short-term working capital need and tend to be self-liquidating over a period of time usually less than a year. This source of finance does not cost the business, as there are no interest charges. A bond that is sold at a discount on its par value and has a coupon rate significantly less than the prevailing rates of fixed-income securities with a similar risk profile. But an amendment in the Companies Act, 2000 permitted companies to issue equity shares with differential voting rights. After discussing the characteristics and types of equity shares, let us look at their following advantages: i. Failure to meet these payments raises a question mark on the liquidity position of the borrower and its existence may be at stake. Bonds are generally issued by government agencies, financial institutions and large corporations, and debentures are issued by companies. Content Filtration 6. (i) Irregular Dividend Dividend paid on equity shares is neither regular nor at a fixed rate. While the assets financed by loans serve as primary security, all the present as well as the future immovable assets of the borrower constitute secondary security. iv. Equity shareholders control the business. (v) Right Shares Equity shareholders are entitled to get right shares whenever the company issues new shares. For example, if an expansion or acquisition is allowed with venture capital, the investor might demand part ownership of the firm, rather than simply a share in the profits, including a say in management. (a) The terms and conditions of term loans are negotiable between borrowers and lenders and as a result, it may sometimes affect the interest of lenders. Following points discuss the different types of preference shares briefly: i. It is obtained from Capital market. The profit reinvested as retained earnings is profit that could have been paid as a dividend. There are different vehicles through which long-term and short-term financing is made available. iv. Loans from banks are however less flexible. Sources of Long-Term Finance for a Company, Firm or Business Some of the long-term sources of finance are:- 1. Convertible Preference shares Refer to the shares that can be converted into equity shares after a certain time-period. (iii) Helpful in Following a Balanced Dividend Policy Such a company can follow the policy of paying regular and balanced dividends because it can use retained earnings for paying dividends in the years when there are inadequate profits. However, there is a notified period after which fully paid FCDs will be automatically and compulsorily converted into shares. Refer to the shares that are issued to the employees of an organization. The profits available for ploughing back in an enterprise depend on factors like net profits, dividend policy and age of the organization. Depending on various factors, the period can stretch for more than 5 to 20 years. Long-term finance can be defined as any financial instrument with maturity exceeding one year (such as bank loans, bonds, leasing and other forms of debt finance), and public and private equity instruments. In case of higher profits too, the company is not legally bound to distribute dividends. For example, in India, dividends are free from tax liability for shareholders; however, the organization pays tax on dividend before its distribution at the rate of 12.5%. (i) Costly Source of Finance Lease financing is a costly source of finance for the lessee because lease rentals include a profit margin for the lessor as also the cost of risk of obsolescence. An organization uses term loans to purchase fixed assets and fund projects having long-gestation period. In the name of ploughing back of profits, they may declare lower dividends and when the share values fall in the market, they may purchase them at reduced prices. A debenture is a form of financial instrument that provides long-term debt to an organization. Similarly, when the company is wound up, they can exercise their claim on those assets which are left after the payment of all other claims including that of preference shareholders. iii. Share capital or Equity shares The saved taxes are allowed to accumulate as reserves. v. Redeemable Preference Shares Refer to the shares that are repaid by the organization. the detail sources of long term financing are shown in the following diagram: long term financing external sources internal sources owners capital retained earnings institutional sources non-institutional sources depreciation provision provident funds sales of fixed asset commercial bank common stock over use of fixed asset Help in raising more funds as they are less risky, ii. 3) Apple raises $6.5 billion in debt via bonds. The warrants attached to it ensure the holder the right to apply and get allotted equity shares; provided the SPN is fully paid. The main sources of term loans are commercial banks, Industrial development Bank of India (IDBI), Industrial Credit and Investment Corporation of India (ICICI), and Industrial Finance Corporation of India (IFCI). (iv) Ownership Dilution If the new shares are issued to the public, it may dilute the ownership and control of the existing shareholders. The advantages of term loans are as follows: ii. The equity shareholders collectively own the company and enjoy all the rewards and the risks associated with the ownership. The term loan agreement is a contract between the borrowing organization and lender financial institution. They have a fixed rate of dividend and they carry preferential rights over ordinary equity shares in sharing of profits and also claim over the assets of the firm. This got worse as Canberra began to worry . 19.2 Objectives. Allow debenture holders to receive payment before equity and preference shareholders even at the time of liquidation of an organization. These preference shares are only paid at the time of liquidation of the organization. In USA there is a distinction between debentures and bonds. In simple terms, it means giving the asset on hire or rent. Internal Sources 10. In other words, a debenture is an agreement between a debenture holder and an organization, which acknowledges that the organization would repay the debt at a specified date to debenture holders. Debentures normally carry a fixed interest rate and a certain date of maturity. Long term finance are capital requirements for a period of more than 1 year. It is a standard clause of the bond contracts and loan agreements. (iii) High Profitability Leasing business is highly profitable to the lessor because the rate of return is more than what the lessor pays on his borrowings. The terms and conditions of such type of loans are not rigid and this provides some sort of flexibility. Most of the new instruments are simply old conventional instruments with some added features. A portion of the net profits may be retained in the business for use in the future. A new company can raise finance only from external sources such as shares, debentures, loans etc. (b) Like any other form of debt financing, term loans also increase the financial risk of the company. (vi) Easy to Sell In comparison to investment in fixed properties, the investment in equity shares is much liquid because the shares can be sold in the market whenever needed. (ii) Fall in the Market Value of Shares If the company does not earn sufficient profits, the shareholders have to bear the loss because of fall in the market value of shares. In this lesson, you will learn about various sources of long term finance and the advantages and disadvantages of each source. The payment of dividend depends on the availability of divisible profits and the discretion of directors. iv. The lessee is free to choose the asset according to his requirements and the lessor is actually the financier. These shares do not carry any preferential or special rights in respect of annual dividends and in the repayment of capital at the time of liquidation of the company. Equity Shares 2. Long term 2; Basics Long term finance - Funding obtained exceeding three years in duration. It is required by an organization during the establishment, expansion, technological innovation, and research and development. A debenture is a marketable legal contract whereby the company promises to pay, whosoever owns it, a specified rate of interest for a defined period of time and to repay the principal on the specific date of maturity. Although depreciation is meant for replacement of particular assets but generally it creates a pool of funds which are available with a company to finance its working capital requirements and sometimes for acquisition of new assets including replacement of worn out plant and machinery. (ii) Simplicity Borrowing from banks and financial institutions involve time consuming and complicated procedures whereas a leasing contract is simple to negotiate and free from cumbersome procedures. In return, investors are compensated with an interest income for being a creditor to the issuer. Entire profits may be ploughed back for expansion and development of the company. Lenders normally lend in proportion to the amount of shareholders funds. Covenants may also include the appointment of nominee director by financial institutions to safeguard their interests. Bonds (debentures) belong to external sources of finance. Earlier all equity shares had equal voting rights. But, an existing company can also generate finance through its internal sources, i.e., retained earnings or ploughing back of profits. These preference shares are issued for a fixed time-period and are paid during existence of the organization. However, there are certain disadvantages of using internal accruals as a source of finance. Allow debenture holders to receive fixed rate of interest, iii. Make the repayment of preference shares possible during the existence of the organization, iii. (viii) Tax Benefits Lease rentals can be adjusted in such a way that the lessee can reduce his tax liability. Maturity refers to the last day of paying the financier the real amount of finance. The amount of capital decided to be raised from members of the public is divided into units of equal value. However, they may be rescheduled to enable corporate borrowers to tide over temporary financial exigencies. Personal savings is money that has been saved up by an entrepreneur. The board members vote on whether or not new investments should be pursued and the type of financing the company should use. The dividend policy of the company is determined by the directors. Equity shareholders are considered as the real owners of the organization. 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