LSC UoS BA Business: A Critical Analysis of Long-Term Finance

This report provides a critical analysis of long-term finance sources available to businesses, focusing primarily on external options for expansion. It delves into the specifics of equity share capital, highlighting its benefits such as high earnings potential, collateral security, liquidity, and stock splitting, while also addressing disadvantages like high costs and the potential for over-capitalization. The report also examines term loans, outlining their advantages including tax deductibility and adjustable maturity periods, alongside limitations such as inflexible repayment schedules and credit risk considerations. Each source is evaluated for its suitability in different business contexts, offering a balanced perspective on their respective strengths and weaknesses. The document is available on Desklib, a platform offering a wide array of study resources for students.

Accounting For Business

Contents
INTRODUCTION...........................................................................................................................1
MAIN BODY...................................................................................................................................1
Long term finance sources...........................................................................................................1
CONCLUSION ...............................................................................................................................3
.........................................................................................................................................................3
REFERENCES................................................................................................................................4

INTRODUCTION
Long term finance is characterized as financial device with maturity surpassing an year.
These sources includes the bank loans, instrument of public or private, bonds, debenture, venture
capital, government subsidies, equity finance and so on. The sources of long term finance are the
factors from where the funds are issued or raised for the long period of time. It is usually raised
for the more than an year. It is needed for the purpose of modernization, development of the
organization, expansion of the business and diversification. To initiate the new business in
manner to sole proprietor, company, partnership owner and so on (Alber, 2020). They all are
needed of short term and long term funds as well.
MAIN BODY
Long term finance sources
 Equity share capital: Equity shares capital refers to capital that receives by generating
the shares to the ordinary public. It is considered as a risk capital but these shares are
issued for the purpose of meeting with the requirement of the funds of a company so the
corporation create an offer to the people to become a part of the organization with the
help of subscribe the shares to them (Fan, Qiu and Sun, 2020). The company provide the
shares to public in change to money. There are various types of the shares such as
ordinary shares, authorised share capital, preference equity shares, subscribed share
capital and so on.
Benefits of the share capital
1. This capital provides high earnings to the shareholder or investors. An individual can
easily make the high income with the help of investing in these shares of any
organization along with income they can earn dividends as well.
2. When a person own the company's equity shares as an investor then the shares are
considered as a collateral security. The equity shares are convenient to taking approval of
loan.
3. It has highly liquidity. It mean the shareholder can easily convert their investment into
monetary term and also can be sold in the market. So it is beneficial at time of any
emergency, the investors can easily liquidate the investment.
1

4. It is best option to split the stocks or shares. It means it has split the shares into various
small parts and reducing the price of the shares (Zhang, Liu and Zhou, 2022). It is
beneficial to the investors.
Disadvantages of the equity share capital
1. The main limitation of this equity share is that the cost of these stocks is high so every
person can not invest in equity shares. So there is high risk of return.
2. There is no limitation of issuing the shares for the company so excessive utilization of the
equity shares can cause over capitalization of the organization.
3. The servicing cost of equity stocks is higher than the preference stocks, debenture or
stocks. The assumption of the shareholder of equity is high in comparison of preference
shares.
4. There is no fixed dividend on investment. It can not control by the investors. If the
company gain the profit so the investors will not get the dividend.
 Term loan: A term loan furnish the borrowers in order to lump sum cash in
conversation for particular borrowing terms. These loan are mostly established for the
small size enterprises for the purpose of purchasing the assets that are fixed in nature
such as building, machinery and so on (Jung, Kim and Han, 2020). In exchange for a
particular amount of cash, the recipient admits to repayment schedule with constant or
floating interest rate. The term loan may need substantial down payments to decrease
the payments and total cost. The borrower do agree to pay their lenders a fixed amount
across the repayment schedule with fixed or variable interest rate. If the returns are
utilized to finance the buy of an asset then the time of usage of the asset can effect the
repayment schedule.
Advantages of the term loan
1. The interest that has been paid to the lender for consumption of the assets are tax
deductible expenses. Thus, the taxation advantages has been provided on interest.
Whereas the tax has been deducted from the dividend of equity and the preferences.
2. The maturity period of the debt devices can be adjusted with respect of the capital that
are required in the firm.
3. The cost of the issuing debt is not more expensive in comparison of the equity capital as
well as preference capital.
2

4. It is very easy way to communicate the details of the proprietary to the private lenders
than to a person of the capital market for the management of the organization.
Limitations of the term loan
1. The repayment schedule of term loan is based upon the assumption that is inflexible if the
loan contains strict policy on repayment (Kusimba, 2021). The borrower has to do
payment before its maturity period whether they have money or not.
2. If the small size enterprise lender providing a loan then the credit risk of the borrower is
essential element to consider. The leaders of the working capital represent the
requirements of the strict eligibility.
3. If the borrower or person missed to pay the EMIs then their credit score has been
minimized. It will impact on their further loan sanctions.
4. In the term loan, there are number of lenders who will require the collateral. In case the
lender contemplates the organization a financial risk so they might be require borrower to
put down any kind of collateral.
CONCLUSION
In above report, it can be concluded that there are avail large number of the sources of
long term finances. These factors are furnished through the general public or outsiders of the
organization. Each and every element or source has their own benefits and limitations as well. In
above report. There has been discussed about the equity shares and as well term loan.
3

REFERENCES
Alber, N., 2020. Finance in the time of coronavirus during 100 days of isolation: The case of the
European stock markets. Available at SSRN 3631517.
Fan, X., Qiu, S. and Sun, Y., 2020. Land finance dependence and urban land marketization in
China: The perspective of strategic choice of local governments on land transfer. Land
Use Policy, 99, p.105023.
Jung, Y., Jung, J., Kim, B. and Han, S., 2020. Long short-term memory recurrent neural network
for modeling temporal patterns in long-term power forecasting for solar PV facilities:
Case study of South Korea. Journal of Cleaner Production, 250, p.119476.
Kusimba, S., 2021. Reimagining Money: Kenya in the Digital Finance Revolution. Stanford
University Press.
Zhang, W., Liu, X., Liu, J. and Zhou, Y., 2022. Endogenous development of green finance and
cultivation mechanism of green bankers. Environmental Science and Pollution
Research, 29(11), pp.15816-15826.
(Alber, 2020)(Fan, Qiu and Sun, 2020)(Jung, Kim and Han, 2020)(Kusimba, 2021)(Zhang, Liu
and Zhou, 2022)
4