LSC UoS BA Business: Analyzing Sources of Long-Term Finance

This essay critically analyzes various sources of external long-term finance available to businesses, both incorporated and unincorporated, for expansion purposes. It delves into the specifics of debentures, highlighting their low-risk nature and tax benefits, while also noting limitations on raising funds and lower returns. Bonds are examined as secured loans with fixed returns, offering stability but posing liquidity challenges. Equity share capital is presented as a means of raising funds from the public, granting voting rights but incurring high costs and potential insider trading risks. Preference share capital, a hybrid instrument, is discussed in terms of its advantages, such as no fixed liability for dividend payments, and disadvantages, including the lack of voting rights. Finally, venture capital is explored as a source of funding for startups, facilitating expansion and network development. The report concludes that each source offers distinct benefits and drawbacks, influencing a company's financial strategy.

Long Term Source of
Finance

Table of Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY...................................................................................................................................3
Sources of long term finance..................................................................................................3
CONCLUSION................................................................................................................................5
REFERENCES................................................................................................................................6

INTRODUCTION
Long term source of finance is the money required by the company for longer period of
time. It contributes the development, welfare, and helps in the flourishing of the company
(Ahuja, and Kalra 2020). Owner can bring the capital in the organisation through debenture, term
loan, bonds, venture capital and by equity and preference shares. For starting any business like
sole proprietorship, company, partnership owner needs both short or long term funds.
MAIN BODY
Sources of long term finance
 Debenture: It is an debt instrument which helps the organisation to raise money from the
people. It helps the company to raise long term funds. Enterprise has to pay interest along
with the principal amount. It is the unsecured promissory note which is issued by the
private organization with out mortgaging any security or assets.
Merits of debenture:
1. It is the low risk securities which is preferred by many investors.
2. It doesn't affect the rights of equity or preference shareholders so it is easy to control on
management because debenture holders do not have any voting rights.
3. The cost of financing fund through debenture involves low cost as compared to
preference or equity shares. Government has provide tax deductions on interest payment
for debenture holders (Arif and et al., 2021).
4. It is suitable for those investors who want transparency in transaction, safe or healthy
returns. It is not issued for profit purpose.
Demerits of debenture:
1. Company has authorized the limit of raising the amount. The power of organisation to
raise further funds reduces after some time.
2. If there is financial shortage and company is going to wind up then organisation has
priority to pay the amount to debentures holders after the preference shareholders.
3. It provides less return so it is not attractive for those who wants maximum return
from the investment.
 Bonds: It is the securities which is issued by the financial institutions, government and
big corporate sectors. It is a secured loan which is collateral by physical assets. Bonds are

issued for fixed time period and company has to return this amount with fixed interest as
well as sum amount. The interest at which amount is paid to bondholder is known as
coupon rate.
Advantage of bond:
1. Investors will receive the fixed rate of return of income along with the principal amount.
It is the most secured instrument.
2. Bond gets mature after specific period and company prefer bondholders to pay first
instead of stockholders at the time of liquidity (Gao, Xie, and Jia 2019).
3. It is the most stable security as compared with shares because the value of bond fluctuate
with the inflation or interest rate.
4. It is highly rated by credit rating companies. This give an idea to the investors about
selecting the bonds of issuing authorities and the correct time for financing in bonds.
Disadvantage of bond:
1. Company has to spend high amount for purchasing the bond. There is direct link between
bond price and organisation image. Therefore it is difficult for investors to access few
bonds.
2. If company becomes insolvent or bankrupt to pay the amount than in that situation
bondholders might be lost the amount. There is right that they can receive some amount
from the bond.
3. It is the less liquid instruments because company can't convert their amounts frequently.
 Equity share capital: It is the capital which is invested by the company at the starting of
business. The holder of the shares is called equity shareholders. When company needs
huge investment it is the best source to raise the fund from public also through initial
public offer (Harker, and Montgomerie 2020).
Advantage of equity shares:
1. It give the votings rights to the owners of the company. Shareholders have the power to
elect the directors or other members in the general or board meeting.
2. If the profits of the business will increase then shareholder can also earn more dividend.
There is direct relationship between rewards and profit.
3. Company can issue bonus shares to the shareholders from the remain incomes of the
organisation.

Disadvantage of equity share:
1. There are the two reasons for the high cost of the equity shares. First is company pay
dividend after deducing taxes. Second is cost of shares has rises due to brokerage,
underwriting or several expenses.
2. Company faced by the problem of insider trading. It happens when any employee of the
enterprise leak some confidential information about the company and its share price it
will loss the competitive advantage among competitors (Mohsin and et al., 2021).
 Preference share capital: It is known as hybrid instruments because it contain the
features of both debt and equity. It is little bit identical as equity shares.
Advantage of preference shares:
1. There is no fixed liability for the organisation to pay the dividend in case of insolvency.
2. The preference shareholders has right to receive capital at first priority in case of
liquidation of the organisation.
Disadvantage of preference share:
1. The owners of this capital does not get any voting rights so it losses the control in
company.
2. The rate at which company pays the dividend is higher than the equity share capital.
 Venture capital: It is the funds needed by small companies for startup and this helps in the
long term development of the organisation. This provide an opportunity for the company for
expansion, diversification and survival of the business in the long run. It provide helps in
creating connections and developing networks.
CONCLUSION
This report has concluded that three are several sources of long term finance from
external. Every source has its own benefits and drawbacks. Debenture is secured loan as
compared to the bond and it involves low risk. Equity share capital is the permanent source of
finance and company prefers it for investment purpose. It gives the feelings of become part in the
company.

REFERENCES
Books and Journals
Ahuja, B.R. and Kalra, R., 2020. Impact of macroeconomic variables on corporate capital
structure: a case of India. Managerial Finance.
Arif, M and et al., 2021. COVID-19 and time-frequency connectedness between green and
conventional financial markets. Global Finance Journal, 49, p.100650.
Gao, B., Xie, J. and Jia, Y., 2019. A futures pricing model with long-term and short-term traders.
International Review of Economics & Finance 64. pp.9-28.
Harker, C. and Montgomerie, J., 2020. Household finance. In The Routledge Handbook of
Financial Geography. (pp. 308-327). Routledge.
Mohsin, M and et al., 2021. Developing low carbon finance index: evidence from developed
and developing economies. Finance Research Letters,43, p.101520.
(Ahuja, and Kalra 2020) (Arif and et al., 2021) (Gao, Xie, and Jia 2019) (Harker, and
Montgomerie 2020) (Mohsin and et al., 2021)