Sources of Long Term Financing for Business Organizations

This report explains the meaning and various sources for long term financing for business organizations. It gives an overview of the sources of long term finances and benefits and risks associated with each alternative of long term financing.

Accounting for
Business

Table of Contents
INTRODUCTION ..........................................................................................................................3
MAIN BODY...................................................................................................................................3
CONCLUSION ...............................................................................................................................6
REFERENCES................................................................................................................................7

INTRODUCTION
Sources of finance refers to the various alternatives and options available to an
organisation for funding its financial requirements. The sources are mainly distributed as short
term sources of finances and long term sources of finances (Channuntapipat, Samsonova-Taddei
and Turley, 2020). In this report, the meaning and various sources for long term financing are
explained. It gives an overview of the sources of long term finances and benefits and risks
associated with each alternative of long term financing. The sources are helpful to public and
private business organisations in discovering which source of financing is the most suitable for
the business organisation.
MAIN BODY
The sources of finance on the basis of the area of generation are of two types, internal
sources and the external sources of finance. And on the basis of period, the sources of finance are
available in two different types:
1. Long term sources: The long term sources of finances are the one which are used by the
business organisation for a period of more than one year. These sources are collected
from the capital markets. Examples: equity shares, preference shares (Burnett and
Merchant, 2020).
2. Short term sources: These are the sources of finances which are utilised by the business
for a period of less than one year. Examples: working capital loans, commercial loans
(Cheng, 2019).
Incorporated and Unincorporated businesses: There are two different type of businesses
on the basis of the differentiation between business and owner’s identity. An incorporated
business, or a corporation, is a distinct body from the owner of the business and has natural
rights. Whereas, a business owner and an unincorporated business are identical, and the owner
personally bears all the business outcomes.
Owners capital Borrowed capital
It is the money which is invested by the
company internal management like
shareholders and directors.
It is the capital which is taken by the
organization through external sources like
loans from bank, bonds and debentures.
It is permanently invested in an enterprise. It is invested for fixed period of time.

Long term external sources of finances: These are the sources of finances which are
available with organisations to be repaid in the period of more than five years. These sources of
finances are generally displayed with the availability of two options of financing. These are
either equity financing or debt financing (ABU-TAPANJEH and AL-SARAIRAH, 2021). The
various long term external sources of finances available to sole traders, partnerships, and
companies are:
Incorporated business financing: For Company Share capital/ owners capital: The limited companies issue shares in the markets to raise
finance for the business. The companies state for the maximum authorised share capital
in their MOAs. The gross value of the shares is particularly displayed in the balance sheet
of the company (Bargate, 2018). The private limited companies are not permitted for
selling their shares to the normal public and are only allowed to generate funds only from
their friends and families. Share capital is a permanent form of capital as it is only repaid
to its holders when the company goes into a voluntary liquidation. Share capital does not
have any interest payments to be made. The reward made for holding shares comes in the
form of dividend payments on the basis of the amount of profits that the company gets.
The benefit is that in a year where the company does not make good amount of profit, the
firm can avoid to pay dividend to the shareholders (Zhou and Lamberton, 2021). The risk
associated is that it involves the dilution of the company’s ownership rights to some
extent which may or may not be good for the business. Debentures: It is the long term debt instrument which is issued by the private and reputed
company for raising the long term funds. It is generally issued at higher rate of interest
and which is not secured by any collateral security. This is very high risky instruments
for borrowing the money.
Unincorporated business financing: For Sole traders and Partnership Firms Loan capital/ Borrowed Capital: Long term capital borrowed from any banking
institution which involves interest payments regularly. The interest paid can be either
variable or fixed interest payment. The loans which assists companies in long term
financing can be either secured or unsecured. A mortgage is the property which is utilised
to put at stake in the form of a collateral or security to buy the property (Abbott and

Palatnik, 2018). The lender of the long term loan has the right to claim the mortgaged
asset in case the business fails to fulfil for the financial repayment commitments. The
advantage is all types of businesses whether incorporated or unincorporated can borrow
the funds required from banking institutions with essential securities requisite for the
funding. The disadvantage is that the business is lawfully obliged to pay the fixed amount
of interest and the principal sum to lender of the loan, the failure in the same could result
in bankruptcy. Venture capital/industrial specialist: The unincorporated business organisations like
partnership firms and the sole traders receive their financial funding’s majorly from the
source of Venture capitals. Their risky business ideas and ventures which are refused by
the banking institutions to be financed due to the high amount of risk that they pertain are
funded by this source. Venture capital is the term which is used in management buyouts.
It is only appropriate for those businesses which are initiated in the form of
entrepreneurial business organisations. The rich individuals who are termed as business
angels are the sources through whom these business start-ups are able to finance funds for
their businesses (Mowen, Hansen and Heitger, 2022). The benefit associated is that
venture capitalists assist the business to connect with other major business leaders while
also giving the firm opportunity to grow faster than others. The risk involved is that
searching for venture capital funding has the fund amount relatively lower and is
difficult to find.
CONCLUSION
From the above report, it can be concluded that business organisations have a variety of
sources of financial funding available to them for financing their needs of business startup,
business expansions or even mergers. The report explains the various sources of finances
available to the public limited and the private limited companies. The type of financing which
can be done by the companies and the availability of the amount of funding which they can take
for their businesses. It also explained three different sources of long term financings available to
companies with respect to the benefits and the consequences attached to all three.

REFERENCES
Books and Journals
Abbott, J.I. and Palatnik, B.R., 2018. Students’ perceptions of their first accounting class:
implications for instructors. Accounting Education, 27(1), pp.72-93.
Abdulahad, A.F., 2020. The extent of the contribution of the electronic accounting education in
the development of the professional skills for the accounting techniques department
graduates. Managerial Studies Journal, 12(24).
ABU-TAPANJEH, A.M. and AL-SARAIRAH, T.M.K., 2021. The Availability of Forensic
Accounting Application Factors to Enhance the Auditors Efficiency in Jordan. The
Journal of Asian Finance, Economics and Business, 8(3), pp.807-819.
Bargate, K., 2018. Making accounting tutorials enjoyable. Africa Education Review, 15(1),
pp.224-238.
Burnett, C. and Merchant, G., 2020. Literacy-as-event: Accounting for relationality in literacy
research. Discourse: Studies in the cultural politics of education, 41(1), pp.45-56.
Channuntapipat, C., Samsonova-Taddei, A. and Turley, S., 2020. Variation in sustainability
assurance practice: An analysis of accounting versus non-accounting providers. The
British Accounting Review, 52(2), p.100843.
Cheng, Y., 2019, April. Research on the Reform of Accounting Course System Guided by
Accounting Education Objectives. In 1st International Symposium on Education,
Culture and Social Sciences (ECSS 2019) (pp. 468-472). Atlantis Press.
Mowen, M.M., Hansen, D.R. and Heitger, D.L., 2022. Managerial accounting: The cornerstone
of business decision-making. Cengage learning.
Warren, C.S. and Jones, J., 2018. Corporate financial accounting. Cengage Learning.
Zhou, Y. and Lamberton, G., 2021. Teaching double-entry accounting: A simplified scaffolded
technique based on cognitive load theory. Journal of education for business, 96(7),
pp.445-453.