What are Long Term Financial Sources: To run a business or organization for long duration needs some sources of finance permanently. Long term financial sources are those, which remains the business for a duration of time. The main advantage of this loan that it is not been paid immediately or within shorter time duration. There are so many companies that requires fund for various operations and financial requirements. Before that you have to understand the meaning of long-term loans. The article helps to understand the features of loans, and the advantages and disadvantages of long term loans.
What Are Long Term Loans?
It is considered one of the types of credit in the financial sector. Basically, long term loan can be defined as loans that have a longer tenure exceeding one year and can go up to 30 years. There are various types of loans such as home loans, car loans, education loans, personal loans, etc.
What are Long Term Financial Sources?
Long term financial sources are further divided into two categories i.e.. internal long-term sources of finance and external long-term sources of finance. Some of the Long term financial sources are Equity Shares, Preference Shares, Ploughing Back of Profits.
1. Equity-Shares
Equity Shares which is also known as ordinary shares represent the ownership rights of an organization. The equity shares are the legal owners of the company. A public company may raise funds or assets from promoters, investors or individuals by issuing common equity shares of a company. The equity share holders or investors are paid dividends just when there are distributable earnings. The rate of dividend on equity shares is not fixed and depends upon availability of dividend profits and the intention of the directors.
2. Preference Shares
Another Long term financial sources for a company are Preference shares. These shares carry preferential rights over equity shares both regarding the payment of dividend and the return of capital. The rate of dividend on equity shares is fixed and such dividend shall be paid in full before any dividend is paid on equity shares. The whole of preference capital must be paid at the time of liquidation and before any payment is made to equity shareholders.
3. Debentures
It is one of the types of loan that is frequently used by a company to raise long-term funds. Funds raised by issuing debentures represent debt incurred by the company and are also known as ‘debt capital‘. A debenture basically is a certificate which is issued by a company under its seal acknowledging a debt due by it to its holders. Debentures can be placed via public or private placement.
4. Term Loans
It is one kind of secure loan which is offered by banks against strong collaterals provided by the company in the form of land and building, machinery, and other fixed assets. It is also an example of Long term financial sources. This types of loans can be repaid in regular payments over a set period of time.
5. Retained Earnings
It is another Long term financial sources of a company. Basically, these are the profits that the company has set aside over time to meet the company’s future capital needs. The company can use it for expansion and growth of the business without taking on additional debt burden and giving away more equity in the business to an outside investor.
6. Lease Financing
Lease is a contract between the owner of an asset and the user of the asset. Owner of the asset is called ‘Lessor’ and the user is called ‘Lessee’. Under lease financing, the property owner surrenders the right to use the asset to another party for an agreed period of time for an agreed consideration called lease rent. The lessee pays a fixed rent to the lessor at the beginning or end of a month, quarter, half year or year. At the end of the lease term, the property reverts to the lessor, who is the legal owner of the asset.
