Sources of Long Term Finance: An In-Depth Comparative Study

This report discusses external sources of long-term finance, focusing on equity share capital and term loans, highlighting their advantages and disadvantages. Equity share capital involves selling company ownership, offering flexibility in liquidation and capital sourcing but diluting control and posing risks. Term loans provide fixed assets on lease, beneficial for small businesses with lower interest rates and flexibility, but require collateral and strict repayment terms. The report concludes that understanding these sources is crucial for financing organizational goals, with options varying based on the company's listing status and financial objectives. Desklib offers a platform for students to access similar solved assignments and study resources.

Sources of long term
finance

Table of Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY...................................................................................................................................3
Sources of long term finance......................................................................................................3
Advantage of term loan:...................................................................................................................4
CONCLUSION................................................................................................................................5
REFERENCES................................................................................................................................6

INTRODUCTION
Finance is the most important part of business growth and development. Financing is way by
which company gets the enough amount of fund required to meet its short term and long term
goal. Irrespective of the type of business any sources of finance can be used according to the
suitability of the situation (Blessin and Mullins, 2020). In this report external sources of long
term finance are going to discussed. Brief discussion on the similarity and dissimilarity between
different sources is done. Further, different types of business firm usage for various source of
finance are to be noted.
MAIN BODY
Sources of long term finance
External long term finance- It depicts that time period specified is more than five years,
there are two choices for deciding on the method of finance. That is issue of shares or going
for debt.
Equity share capital: It is the method of finance capital is received by way of selling
company’s ownership. It is risky decision because the control under this method is
diluted from the original owners and shareholders becomes the owner of the organisation.
It can be only issued by incorporated company, unincorporated business like sole traders
and partnership firms cannot issue shares. There is various type of shares, equity,
preference and subscribed share capital and so on.
Advantage of share capital:
There is no as such liability of providing interest on the capital used. It is easily available in the
security market if the company is listed one. An investor can earn a lot of amount in no
time by investing in the right and reliable company (Gundogdu, 2019).
1. There no liability to pay back the sked amount to shareholder, high capital investment
can easily be sourced by this method.
2. This source of finance provides flexibility of easily liquidation i.e. can be converted to
cash easily. An investor seeks this as very reliable source of investment. There no
bounding of time duration for which they should be sourced.

3. Incorporated company even can exercise stock option even in the foreign countries. And
there is flexibility of adjusting the amount of finance according to the need and
requirement of the organisational goal.
Equity share capital issue can be split and further be sold and purchased easily, there is an option
of buy back where company can take back its share from the shareholders (Okafor and
Ujah, 2020)
4. .
Disadvantage of equity share
1. In this source there is lot of risk involved
2. Option is only available for company
3. There is no profit on payment of dividend
4. No tax benefit available
5. Risk of losing control
6. Risk of allocating fund from this sources is higher than debt sources and preference
7. There is no fixed amount of profit or payment on this source.
Term loan:
It helps to provide the fixed assets on lease. In other words, it refers to the take assets on
lease in exchange to lump sum amount of cash. These kind of loan basically taken by the
small business for initiate the business in less capital. In this loan the borrower has to do
payment earlier it means before of the specific given time period or maturity period whether
they have money or not. If they do not have money to pay the rent or EMIs to the borrower so
it will decrease their credit score and it will create problem in future when they want to take
loan. The lender can be anyone such bank, finance limited company and so on. The term loan
contains the assets on down payments to minimize the payments and all over cost of that
particular assets (Piemonte and et al., 2019).
Advantage of term loan:
 The term loan is available at the lower interest rate and it is provided for the shorter or
longer period.
 There is no so much formality to approved the loan for the short term basis. For taking
the long term loan it requires the lot of formalities and procedures for taking the loan.
 It provides the greater flexibility and it gives the more scope for the negotiation in the
organization. If the company has good credit score it enjoy the benefits of flexibility of
the loan.

 It provides the more fund for the expansion, diversification and the modernization of the
business. It gives the fund for the longer period of time.
 It is the part of the external debt and does not impact on the equity fund of the company.
It does not have control on the operations of the company.
Limitations of the term loan
 There is continue obligation for payment of interest and other liabilities, failure to
payment might risk the credit worthiness of the organisation. Also there is risk of
conflicts and even business discontinuation in case of bankruptcy.
 For using this source there is need of keeping assets as collateral security for the loan
amount.
 There is strict rule repayment regarding the time period and interest rate. Outstanding
amount of interest can overlap as time passes and can turn into huge amount of debt.
 This option is available for each kind of business type but there is lot of checking and
paperwork requirement that ned to be done for availing the option (Xiong, Dong and Xu
2022).
CONCLUSION
In this it was concluded that long term sources of finance are used for financing goals of
the organisation. Long term is a period more than five years or more. Basically there two
sources debt and equity which can be used. Unlisted company cannot use equity source of
long term finance for financing. Listed company have more methods of financing. The
different source of long term finances is debenture, shares, financial institution, venture
capitalist and banks. These can be used according to the situation and goal of financing.

REFERENCES
Books and Journals
Blessing, A. and Mullins, D., 2020. Organisational hybridity in affordable housing finance.
In Handbook on Hybrid Organisations. Edward Elgar Publishing.
Gundogdu, A.S., 2019. A modern perspective of Islamic economics and finance. Emerald Group
Publishing.
Okafor, C.E. and Ujah, N.U., 2020. Executive compensation and corporate social responsibility:
does a golden parachute matter?. International Journal of Managerial Finance.
Piemonte and et al., 2019. Transition Finance: Introducing a new concept.
Xiong, W., Dong, M. and Xu, C., 2022. Institutional Investors and Corporate Social
Responsibility: Evidence from China. Emerging Markets Finance and Trade, pp.1-12.