Thursday, March 8, 2012

Long term financing sources

Long term financing sources:

Arrangements of any firms in a business for period exceeding 10 years is usually considered as long term
financing.
• Reason for having long term finance:
1. Procurement of different fixed assets.
2. For setting up new business.
3. Expansion of the existing business.
4. Extension of the business.
5. Balancing and modernization of existing business.
The important sources of long term finances are:
1. Issue of shares
2. Issue of bonds
3. Loans from specialized financial institutions and
4. Plowing back/retained earnings of profit.

          term instruments are called in one sentence as corporate securities.
Ownership securities (shares)
Preferred shares and common shares(equity)
Corporate securities
Creditor ship securities (bonds)
Ownership securities:
Preference shares: Preference shares are those shares which have preferential rights to the payment of
dividend and to the return of capital in case of liquidation.
The features of preference shareholders are:
1. The dividend is fixed.
2. They receive the dividend before the common shareholders.
3. They receive their capital back before common shareholder and they get their capital back if
they are redeemable shares.
4. Preference shareholders do not have voting rights in company affairs.
The features of common/ordinary/equity shareholders are:
1. They do not have fixed rate of dividend.
2. They are entitled to dividend after preference shareholders.
3. Thirdly similar things happen in case of liquidation of the business.
4. Equity shares are always irredeemable.
5. They have voting rights in company affairs.
Creditor ship securities: Bond is one of the creditor ship securities.
Bond: Bond is a long term debt instruments in which the issuing company promises to pay interest
periodically at a stated rate of interest and the principal at maturity.
Features of Bond:
1. It has a face value.
2. It is followed by a coupon rate/interest rate.
3. There has to be maturity period.
4. The name of issuing company.
5. Date of issue.
6. Rights and privilege of issuing company and buyers.
[Note: The bond which have no interest rate but it is sold in less than face value of bond. After maturity
period it can be placed at face value.]
There are two legal protection for bond holders:
1. Bond indenture.
2. There is a trustee.
1. Bond indenture: It is a paper which have all features of band in printed document. It is a legal
documents stating the conditions under which the bond has been issued. It’s specifies both the rights
of the bond holders and obligations of the issuing company’s.
2. Trustee: A fixed party which guaranties the adherence of the conditions in the indenture. The trustee
acts as watch-dogs on behalf of the bond holders to protect their interest.
Types of bond: There are two types of bond. Such as- a) Secured and b) Unsecured bond.
a) Secured bond: It is categorized into three types. Such as—
• Mortgage bonds
• Collateral bonds
• Equipment bonds
b) Unsecured bond: It is two types. Such as-
• Debenture
• Sub-ordinate debenture
Cost of long term financing: The cost structure of long term financing is influenced by:
1. The maturity of the loan.
2. Size of the loan.
3. Financial creditability of the borrower.
4. Cost of funds to the lender.
Processing or issuing corporate long term securities:
1. New issues of long term securities are concerned with both new firms and existing firms. New issues
come to market through:
• Public issue.
• Direct placement.
• Special issues (right shares, bonus shares and employees shares).