Sources of Long-Term Finance for Business Entities

This report provides a critical analysis of external sources of long-term finance for different business entities, including sole traders, partnerships, private limited companies, and public limited companies. It explores sources such as family and friends, term loans, loans from banks, angel investors, preference shares, debentures, equity shares, and retained earnings.

Accounting for business

Table of Contents
INTRODUCTION...........................................................................................................................1
MAIN BODY..................................................................................................................................1
Critical analyse of sources of long-term finance for business entities........................................1
CONCLUSION................................................................................................................................3
REFERENCES................................................................................................................................4

INTRODUCTION
Accounting for managers assist in monitoring of organisational performance through comparison
with past performance, key performance indicators, industrial benchmarks as well as competitor
analysis (Msabaha, 2018). Present report highlights external long term sources for business
entities such as sole traders, private limited companies, public limited companies and
partnerships.
MAIN BODY
Critical analyse of sources of long-term finance for business entities
Finance is essential for acquiring resources that are significant and required for attaining
productive economic practices together with carrying out functionalism such as paying
compensations, reason for uncertainty, sales promotion and hence forth. Sources of finance are
approaches through which organisation gets money for carrying out practices. Mentioned below
are some external sources of funds for various business entities:
Sole traders: These refers to unincorporated business that have one owner to manage
operations and control risks (Mersha and Ayenew, 2018). Davison Canners is one of listed sole
trader in UK that is popular as gourmet growers which caters for dessert, dairy along with
bakery. Mentioned below are external sources of funds for sole trader that is Davison Canners:
Family and Friends: Sole traders generally obtain funds from family and friends which
they pay back with minimal interest charges. With this source, entrepreneur of Davison Canners
arranges funds without putting something for security and agrees for longer repayment period
with minimal interest charges. It is critically analysed that the source results in disputes among
close ones.
Term Loan: It is delineated to long term secured debt that is extended by financial
institutions to carry out projects maturing among 5 and more years which are repaid either
monthly or quarterly equal instalment. For Davison Canners, the source is suitable to make
heavy investment in business for expansion of business.
Partnerships: These are defined to arrangement among two or more individuals for
establishing, overseeing and managing business operations along with sharing liabilities with
profits. For example, Social Chain is listed as partnership entity as its founders Steve Bartlett and
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Dom McGregor started working under partnership deed. Key external long-term sources of funds
for Social Chain are as analysed:
Loans from banks: There are ample number of financial institutions or banks from
which businesses takes finance from and repay following 5 or under 10 years of period (Karbasi
Yazdi and Mohammadian, 2017). With this source, partners of Social Chain could repay funds
according to their convenience and experience benefit of taxes.
Angel investors: These are people who are read to make investment in a business venture
that aims to expand in new market. Angel investors usually have spare cash and are looking for
entities for higher return rates. With this source, partners of Social Chain arrange funds quickly
and require no collateral to acquire required number of financial resources for business.
Private Limited Companies: It is entity that is set directly through registering with
Companies House. It is kind of business entity which is owned by non-governmental
establishments which do not offer shares or trade for general public on stock exchange. River
Island is an example of Private Limited Company which operate in number of worldwide
markets. There are certain external sources of long-term funds used in River Island that are
described below:
Preference shares: It refers to those shares that got preferential rights to receive fixed rate
of dividend. Preference shareholders have right to vote in matters which impacts on their interest.
By using preference share, River Island retain control that leads to dilution of control, increasing
marketability and provide regular debenture interest.
Debentures: These are also known as creditor ship securities that are issues by an
organisation (Manning, 2017). It carries fixed interest rate and principal amount is to be repaid
on fixed date. For River Island, debenture is great external long term source as the entity have to
pay fixed interest amount irrespective of profit that are earned by them and is cheapest source to
raise long term funding.
Public Limited Companies: An establishment which have limited liability along with offers
shares to general public are termed as public limited companies. Tesco PLC is a kind of such
business entity whose shares are freely sold along with traded with general public. External long-
term sources to acquire funds by Tesco Plc are as discussed:
Equity shares: These are ordinary shares that do enjoy preferential rights for receiving
dividend together with repayment of capital. When organisation makes good profit then equity
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shareholders get good dividend rates for invested amount. Through the source, Tesco Plc need
not to declare any dividend when they earn profit and do not create any charge on organisational
assets.
Retained earnings: It refers to the income that business have accumulated in last years and
are known as reserve funds of company. With retained earnings, Tesco Plc enjoys no obligations
and easily escape from crushing effects of pressures. It also does not dilute business ownership.
Its limitation is that once funds are gone then they are not available for upcoming unforeseen
issues that could be faced in future (Whitford, Hewlett III and Prager, 2020).
From the mentioned external long-term sources of funds, it is evaluated that these sources
have similarity that they help business entities to acquire funds easily and continue operations to
achieve objectives. At same time, all sources are different from each other.
CONCLUSION
As per the report, it is concluded that accounting for managers provides financial
information along with resources to people at managerial position for framing rational decisions
for betterment of enterprise. Sources of finance are important to arrange and acquire financial
resources for activities related to expansion in current or new commodity markets. Key external
long-term sources of funds that business entities goes for are bank loan, angel investors,
preference share, debentures and many more.
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REFERENCES
Books and Journals:
Karbasi Yazdi, H. and Mohammadian, M., 2017. Effect of profitability indices on the capital
structure of listed companies in Tehran Stock Exchange. Advances in Mathematical
Finance and Applications. 2(3). pp.1-11.
Manning, M., 2017. Workshop on ‘Finance, Investment and Productivity’. In Workshop on
‘Finance, Investment and Productivity’(March 17, 2017). Bank of England Quarterly
Bulletin (p. Q1).
Mersha, D. and Ayenew, Z., 2018. Determinants of Access to Finance of Smallholder
Farmers. Horn of African Journal of Business and Economics (HAJBE), 1(1), pp.129-
131.
Msabaha, O. J., 2018. Accessibility of funds for supporting primary school education among
poor families in Mbeya district council, Tanzania (Doctoral dissertation, University of
Dar es Salaam).
Whitford, J. J., Hewlett III, R. and Prager, R .L., 2020. Understanding Institutional Finance 101:
Leadership Beyond the Operating Room. The Annals of Thoracic Surgery.
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