Accounting for Business: Evaluating Long-Term Financing Strategies

This report examines long-term sources of finance for businesses, providing an overview of various financing options and their implications. It begins with an introduction to long-term financing, emphasizing its importance for business expansion, technological innovation, and research and development. The main body of the report details five external long-term financing sources: equity shares, debentures, lease financing, loans from financial institutions, and venture capital. Each source is explained, highlighting its characteristics, advantages, and potential risks. The report also discusses the differences and similarities among these financing methods, assisting businesses in selecting the most appropriate option based on their specific needs and financial capacity. The conclusion summarizes the key findings, underscoring the importance of carefully assessing available financing sources to make informed decisions about long-term financial strategies.

Accounting for Business

Contents
INTRODUCTION...........................................................................................................................1
MAIN BODY...................................................................................................................................1
CONCLUSION ...............................................................................................................................2
REFERENCES................................................................................................................................3

INTRODUCTION
Long term sources of finance is the mode of finance which is obtained by the companies
and various organisations to be able to finance their long term financial requirements relating to
their organisational needs (Weigand, Blums and Kruijff, 2018). In this report, an explanation of
the meaning and the various types of long term sources of finance along with their differences
and similarities is given. This report also consists an explanation for all the types and varieties of
financing opportunities available to the business organisations for their long term sourcing needs
is provided with examples. The sources mentioned in the report are explained giving an
overview of the risks and benefits associated with them to assist the business organisations in
deciding upon the most suitable type of long term financing option for their organisation.
MAIN BODY
Long term external sources of finances: Long term sources of finance are the one that
are obtained by the organisations to finance their needs for a period of more than one year. It is a
requisite for the business enterprises to provide for their needs of expansions, establishments,
innovations relating to the technological improvements and for performing research and
developments in the organisation. These long term sources are specifically provided with the
accessibility of two options for financing as equity financing or debt financing. The respective
long term external sources of finances accessible to the organisations of sole traders,
partnerships, and companies are given below:
1. Equity shares: These are also termed as ordinary shares which represent the ownership
capital in an organisation. The individuals who hold the equity shares in the organisation
are the legal owners of the company and they enjoy an unrestricted claim on the
company's income and assets. They also acquire for all the voting rights and powers in
the organisation. It is the most essential source of long term financing for all the types of
organisations as the foremost objective of any business organisation is to maximise the
value of company's equity shares (Riley and Yen, 2019). In case of these sources, the
dividend rate to be given on these shares is not fixed and is dependent upon the amount
of profits that the business generates in the respective financial year.
2. Debentures: It is one of the most frequently used methods of long term financing utilised
by various business organisations for raising long term funding. It represents the funds in
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the form of loans that are acquired by the enterprises and is termed as 'debt capital'. A
debenture corresponds to a certificate which is issued by the organisations in admittance
to the debt which is due to the holders by the company (Turner, Weickgenannt and
Copeland, 2020). There is no type of collateral backing provided to the party which is
providing the loan and hence it purely depends upon the credit worthiness and the
reputation of the enterprise which goes to acquire financing through debentures. The
amount raised through debentures get along to be a part of the capital structure of the
company but it does not becomes the share capital.
3. Lease financing: It is a contract in between the owner of the asset and the individual who
aims to be the user of the respective asset. The owner is termed as 'Lessor' and the person
or organisation who is going to use the asset is known as 'Lessee'. In the lease contract,
the organisation or individual owning the asset provides the lessee the right to utilise the
asset which is mentioned in the contract for a specified time period and for an agreed
amount of consideration. The agreed amount here is termed as lease rental which is paid
back by the enterprise which goes on to utilise the asset in consideration. When the time
period mentioned in the lease contract comes to an end, the asset and its authority goes
back to the lessor who is the legal owner of the asset (Li, 2020).
4. Loans from Financial Institutions: Financial institutions are an essential source of
external long term financing. There are various financial institutions which provide for
the financial needs and requirements of the organisations such as sole proprietors,
partnership organisations and companies at national and international levels (Papadakis
and et.al., 2020). These are established to provide for long term financing needs of these
enterprises for various business purposes while demanding a specified interest rate from
the organisations taking these loans. The interest amount is to be paid back along with the
principal sum of money that the undertaking obtains from these institutions in the tenure
of repayment of these loans.
5. Venture capital/industrial specialist: There are various special business organisations
which provide for the financing needs and requirements of the businesses that are risky in
nature or the ventures and ideas are unique in themselves. These are mostly such business
enterprises that are refused to be given loan or financial supports by the banking
institutions primarily due to the high risks associated with them. Venture capital refers to
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the management buyouts which is appropriate only for such enterprises that are
entrepreneurial in their nature (Petkov, 2020). The source of funding for the business
organisation in this scenario are the angle investors or the business angels who provide
financial support to such startups or businesses that are unincorporated. For the time
being, these investors sometimes acquire for an amount of share capita of the
organisation for the amount of funding that they provide to the business or the startup.
CONCLUSION
From the above report, it can be concluded that business enterprises assess various
different varieties of financing sources available to them when deciding upon the most suitable
source of financing for the organisation. The report aids to conclude the five major types of
external long term financing options which the businesses of sole traders, partnerships and
companies either incorporated or unincorporated which they have to choose from. The
conclusion made is that the most suitable financing option is chosen depending upon the capacity
of the financial funding that the organisation can utilise from the various available sources for
their businesses.
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REFERENCES
Books and Journals:
Li, H., 2020. Business strategy, accounting conservatism and performance. Accounting and
Finance Research, 9(2), pp.1-23.
Riley, T.J. and Yen, A.C., 2019. Accounting narratives. In Oxford Research Encyclopedia of
Business and Management.
Papadakis, S., and et.al., 2020. Machine Learning Applications for Accounting Disclosure and
Fraud Detection. IGI Global.
Turner, L., Weickgenannt, A.B. and Copeland, M.K., 2020. Accounting information systems:
controls and processes. John Wiley & Sons.
Petkov, R., 2020. Artificial intelligence (AI) and the accounting function—A revisit and a new
perspective for developing framework. Journal of emerging technologies in
accounting, 17(1), pp.99-105.
Weigand, H., Blums, I. and Kruijff, J.D., 2018, June. Shared ledger accounting-implementing the
economic exchange pattern in DL technology. In International Conference on Advanced
Information Systems Engineering (pp. 342-356). Springer, Cham.
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