Sources of Long Term Finance for Business Organizations
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Added on  2023/06/08
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This report explains the long term sources of finance available to sole traders, partnerships, and companies, including equity shares, debentures, term loans, and hire purchase. It also describes the advantages of each source of finance.
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Sources of Long Term Finance
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CONTENTS CONTENTS....................................................................................................................................2 INTRODUCTION...........................................................................................................................1 MAIN BODY..................................................................................................................................1 CONCLUSION................................................................................................................................2 REFERENCES................................................................................................................................4
INTRODUCTION Sources of finance defines the various different sources that assist the business organisations in financing their business requiremnets.it can be divided into various types bases on various different bases. On the basis of times period the sources are divided as short term sources of finance and long term sources of finance(Chu, Mathieu and Mbagwu, 2019). In this report, the long term sources of finance that are available to the business ofsole traders, partnerships, and companies are explained briefly. This report also includes the description of the respective advantages that the businesses get from choosing a particular source of long term finance. The businesses can choose upon the long term source of financing for the organisation depending upon the financing requirements that their business demands. MAIN BODY Long term external sources of finances:The long term finances can be described as a source of finance whose maturity exceeds a period of more than one year.The external sources are adopted by the business organisations in case the business is commencing its new workings or the internal sources of the business have been exhausted completely. The external long term sources together imply for such financing requirements that are obtained from outside the business organisation such as equity, debt financing, term loans, lease financings and many more. These sources are looked by the business organisations when they are searching for an almost permanent option which finance for their huge financial requirements(Gittings, Taplin and Kerr, 2020).The corresponding long term external sources of finances available to the businesses ofsole traders, partnerships, and companies are specified beneath: 1.Equity shares: Equity financing is one pf the most common sources of long term external financing. It involves selling the rights to the shares of the company in return for the money financed for the same. The investors who purchase the shares of the company claim for the particular proportion of company’s shares and are called shareholders. They are referred to be the owners of the company for the part of shares that they paid for and are accountable to receive dividend from the organisation when it makes profits.Since the payment of dividend is not a fixed obligation for the organisation and is only to be paid when the company makes enough profits, it is advantageous for many business 1
organisations to finance their long term needs through equity financing. Equity finance does involve dilution of organisations ownership and distribution of voting rights to the shareholders(Lin, Yang and Wang, 2018). 2.Debentures:Debentures are also one of the most primary option of long term financing through external sources. It is preferred over equity financing by many organisations who do not aim upon diluting their ownership and control. Debentures provide the financing to the business organisations and involve an interest payment along with the amount of principle to be paid.It is also advantageous to the business organisations as the interest payment made on debentures is tax deductible and hence save a lot of amount for the business organisations. In case of debenture financing, there is no dilution in the profit shares of the company and the lender of the debt financing is only liable to the interest payments against the debt amount. Debt financing is free of any collateral security against the debt amount being provided to the company and hence proves to be beneficial for various organisations. 3.Term Loansfrom Financial Institutes, Government, and Commercial Banks: A term loan offers the borrowers the sum of money in return of some specific terms for borrowing. The term loans are generally recognized for the small business organisations who have a sound financial statements. The borrowing business organisation is required to pay the lender of the loan with the stated fixed amount in a specified time period along with the interest due on it with either fixed or floating interest rate. Term loans are preferred by the business organisations as they arrange for a more flexible repayment schedule along with a low rate of interest(Maksy and Yoon, 2019). Providence of term loan requires a collateral from the organisation which needs the loan which is to be under the control of the ender of the term loan until the repayment of the term loan has been made. It also involves a very demanding process for the approval of the term loan and hence reduces the risk of failure in payments or any defaults. 4.Hire purchase:It is one of the most frequently utilized means for the purpose of financing for the acquisition of various business assets. It works by spreading the whole value of the asset over a longer period of time. Hence it is an effective source of external long term funding as it frees a huge amount of capital too be utilized for other purposes in the business. In hire purchase, the person owing the asset lets any other individual or an 2
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entity which can be termed as hirer, to hire the asset for a specified time period and make periodic payments for the hire(Tahat, Omran and AbuGhazaleh, 2018). These periodic payments made to the owner of the asset comprise of even the interest payments along with the asset price which is being paid. This source of financing helps companies to utilize the excess funds left with them for improving upon their earning performance and capacity. CONCLUSION From the report prepared above, it can be concluded that long term financing is an essential and accessible source of financing for all the different organisations of sole traders, partnerships and companies either incorporated or unincorporated. The report has been helpful to accomplish the major sources of long term external financing that are accessible for all the business organisations and what benefits each one provides to the different business institutions. The majornecessitiesforwhichtheexternallongtermfinancingisrequiredare expansions,procurement of new assets, appointment of additional staff or refinancingfor payment of any existing debts. 3
REFERENCES Books and Journals: Chu, L., Mathieu, R. and Mbagwu, C., 2019. Independent directors, business risk, and the Informativeness of accounting earnings for debt contracting.Canadian Journal of Administrative Sciences/Revue Canadienne des Sciences de l'Administration,36(4), pp.559-575. Gittings, L., Taplin,R. and Kerr, R., 2020. Experientiallearningactivitiesin university accountingeducation:Asystematicliteraturereview.JournalofAccounting Education,52, p.100680. Lin, Z.J., Yang, D.C. and Wang, L., 2018.Accounting and auditing in China. Routledge. Maksy, M. and Yoon, M.H., 2019. Factors Associated with Student Performance in Cost Accounting An Empirical Study at a US Commuter Public University.The Journal of Applied Business and Economics,21(1), pp.71-88. Tahat, Y., Omran, M.A. and AbuGhazaleh, N.M., 2018. Factors affecting the development of accounting practices in Jordan: an institutional perspective.Asian Review of Accounting. 4