Sources of Long Term Finance

Presented by:
Pisa Tatin
MBA/14/14
North Eastern Regional Institute
of Science & Technology
 Why Finance is required ?
• Start a business.
• Finance expansions to production capacity.
• To develop and market new products.
• To enter new markets.
• To pay for the day to day running of business.
 Sources of Finance

• Short Term Finance

• Long Term Finance

 Long Term Finance

Long term financing is a form of financing that

is provided for a period of more than a year.
 Purpose of long term finance

1. Finance fixed assets.

2. To finance the permanent part of working
capital.
3. 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
Debentures
Shares

Deferred Credit
Retain Earning

Term Loans
A capital of a company is divided into
small units, each unit is called Share.

• Issue of shares is the main source of long term

finance.
• Shares are issued by joint stock companies to
the public.
• A person holding shares is called a
shareholder.
• Investors are of different habits and
temperaments.
 Shares

Equity Preference
Shares Shares
 1. Equity Shares

Equity Shares are those shares

• Do not enjoy any preferential right in the
matter of payment of dividend or repayment
of capital
• No fixed rate of dividend
 Cont.

• Right to take part in the management of the

company.
• Carry more risk.
 2. Preference Shares
Preference Shares are the shares which carry
preferential rights over the equity shares.

These rights are:

• Receiving dividends at a fixed rate.

• Getting back the capital in case the company
is wound-up.
• Investment in these shares are safe, and a
preference shareholder also gets dividend
regularly.
 Types of Preference Shares

1. Cumulative or non- cumulative

2. Redeemable or irredeemable
3. Participating or non- participating
4. Convertible or non- convertible
 Cumulative & Non- Cumulative

• The holder of cumulative preference shares

are entitled to recover the arrears of
preference dividend before any dividend is
paid on equity shares.
 Cont…

• In case of non- cumulative preference shares,

arrears of dividend do not accumulate and
hence, if dividend is to be paid on equity
shareholders in any year, dividend at the fixed
rate for only one year will have to be paid to
preference shareholders before equity
dividend is paid.
 Cont…

• Note :- Unless specifically mentioned

otherwise, preference shares should be
considered to be cumulative.
Redeemable & Irredeemable

• Redeemable preference shares are those

preference shares whose amount can be
returned by the company to their holder
within the life time of the company subject to
the terms of the issue and the fulfillment of
certain legal conditions laid down in Sec. 80 of
the Companies Act.
 Cont…

• The amount of irredeemable preference

shares can be returned only when the
company is wound up.
 Participating & Non-
participating
• Participating preference shares are entitled
not only to fixed rate of dividend but also to a
share in surplus profits which remain after
dividend has been paid at a certain rate to
equity shareholders. The surplus profits are
distributed in a certain agreed ratio between
the participating preference shareholder and
equity shareholder.
 Cont…

• Non- participating preference shares are

entitled to only the fixed rate of dividend.
 Convertible & Non- convertible

• The holder of convertible preference shares

enjoy the right to get the preference shares
converted into equity shares according to the
terms of issue.

• The holder of non- convertible preference

share do not enjoy this right.
 Debentures

Debenture is a medium- to long-term debt

instrument used by a large companies to
borrow money, at a fixed rate of interest.

• Issue of Loan Certificate given to public.

• Debenture holders have no rights to vote in the
company's general meetings.
• Issued under the common seal of the
company.
Characteristics of Debentures

• Holders are the creditors of the company.

• Holders do not carry voting rights.
• Debentures are secured.
• Debentures are repayable after a fixed period
of time
 1. Redeemable Debentures

These are debentures repayable on a pre-

determined date or at any time prior to their
maturity, provided the company so desires and
gives a notice to that effect.
 2. Irredeemable Debentures

These are also called perpetual debentures.

Accompany is not bound to repay the amount
during its life time. If the issuing company fails
to pay the interest, it has to redeem such
debentures.
 3. Convertible Debentures

The holders of these debentures are given the

option to convert their debentures into equity
shares at a time and in a ratio as decided by the
company.
 4. Non Convertible Debentures

These debentures cannot be converted into

equity shares.
 Retained Earnings

The portion of the profits which is not

distributed among the shareholders but is
retained and is used in business is called
retained earnings.
• As per Indian Companies Act., companies are
required to transfer a part of their profits in
reserves.
• The amount so kept in reserve may be used
to buy fixed assets. This is called internal
financing.
 Term Loans

A term loan is a monetary loan that is repaid in

regular payments over a set period of time.
Term loans usually last between one and ten
years, but may last as long as 30 years in some
cases. Term loan is a loan made by
bank/financial institution to a business having
an initial maturity of more than one year.
 Differed Credit
• A deferred credit could mean money received in
advance of it being earned, such as deferred
revenue, unearned revenue, or customer advances.
A deferred credit could also result from complicated
transactions where a credit amount arises, but the
amount is not revenue.
• A deferred credit is reported as a liability on the
balance sheet. Depending on the specifics, the
deferred credit might be a current liability or a
noncurrent liability. In the past, it was common
to see a noncurrent liability section with the
heading Deferred Credits.
THANK YOU