Presented by:

Pisa TatinMBA/14/14

North Eastern Regional Institute

of Science & Technology

Sources of Long Term Finance

• Start a business.

• Finance expansions to production capacity.

• To develop and market new products.

• To enter new markets.

• To pay for the day to day running of

business.

Why Finance is required?

• Short Term Finance

• Long Term Finance

Sources of Finance

Long term financing is a form of

financing that is provided for a period

of more than a year.

Long Term Finance

1. Finance fixed assets.

2. To finance the permanent part of

working capital.

3. To finance growth and expansion of

business.

Purpose of long term finance

• Nature of Business.

• Nature of goods produced.

• Technology used.

Factors determining long-term financial requirements

Sources of long term finance

Shares

Debentures

Retain Earning

Deferred Credit

Term Loans

• Issue of shares is the main source of long term finance.• Shares are issued by joint stock

companies to the public.

A capital of a company is

divided into small units, each

unit is called Share.

• A person holding shares is called a shareholder.

• Investors are of different habits and temperaments.

Shares

Equity Shares

Preference

Shares

Equity Shares are those shares

• Do not enjoy any preferential right in

the matter of payment of dividend or

repayment of capital

• No fixed rate of dividend

1. Equity Shares

• Right to take part in the

management of the company.

• Carry more risk.

Cont.

These rights are:

• Receiving dividends at a fixed rate.• Getting back the capital in case the

company is wound-up.

Preference Shares are the shares

which carry preferential rights over the

equity shares.

2. Preference Shares

• Investment in these shares are safe,

and a preference shareholder also

gets dividend regularly.

Types of Preference Shares

1. Cumulative or non- cumulative

2. Redeemable or irredeemable

3. Participating or non- participating

4. Convertible or non- convertible

Cumulative & Non- Cumulative

• The holder of cumulative preference

shares are entitled to recover the

arrears of preference dividend before

any dividend is paid on equity

shares.

Cont…

• In case of non- cumulative preference

shares, arrears of dividend do not

accumulate and hence, if dividend is to be

paid on equity shareholders in any year,

dividend at the fixed rate for only one year

will have to be paid to preference

shareholders before equity dividend is paid.

Cont…

• Note :- Unless specifically mentioned

otherwise, preference shares should

be considered to be cumulative.

• Redeemable preference shares are those

preference shares whose amount can be

returned by the company to their holder

within the life time of the company

subject to the terms of the issue and the

fulfillment of certain legal conditions laid

down in Sec. 80 of the Companies Act.

Redeemable & Irredeemable

Cont…

• The amount of irredeemable

preference shares can be returned

only when the company is wound up.

Participating & Non- participating

• Participating preference shares are entitled not

only to fixed rate of dividend but also to a

share in surplus profits which remain after

dividend has been paid at a certain rate to

equity shareholders. The surplus profits are

distributed in a certain agreed ratio between

the participating preference shareholder and

equity shareholder.

Cont…• Non- participating preference shares

are entitled to only the fixed rate of

dividend.

Convertible & Non- convertible

• The holder of convertible preference

shares enjoy the right to get the

preference shares converted into equity

shares according to the terms of issue.

• The holder of non- convertible

preference share do not enjoy this right.

• Issue of Loan Certificate given to public.

• Debenture holders have no rights to vote in the company's general meetings.

Debenture is a medium- to long-term debt

instrument used by a large companies to

borrow money, at a fixed rate of interest.

Debentures

• Issued under the common seal of

the company.

Characteristics of Debentures

• Holders are the creditors of the

company.

• Holders do not carry voting rights.

• Debentures are secured.

• Debentures are repayable after a

fixed period of time

Debentures

Redeemable Debentures

Irredeemable Debentures

Convertible Debentures

Non Convertible Debentures

1. Redeemable Debentures

These are debentures repayable on a

pre-determined date or at any time

prior to their maturity, provided the

company so desires and gives a notice

to that effect.

2. Irredeemable DebenturesThese are also called perpetual

debentures. Accompany is not bound

to repay the amount during its life

time. If the issuing company fails to

pay the interest, it has to redeem such

debentures.

3. Convertible Debentures

The holders of these debentures are

given the option to convert their

debentures into equity shares at a

time and in a ratio as decided by the

company.

4. Non Convertible Debentures

These debentures cannot be converted

into equity shares.

Retained Earnings

The portion of the profits which is not

distributed among the shareholders

but is retained and is used in business

is called retained earnings.

• As per Indian Companies Act.,

companies are required to transfer a

part of their profits in reserves.

• The amount so kept in reserve may

be used to buy fixed assets. This is

called internal financing.

Term Loans

A term loan is a monetary loan that is repaid

in regular payments over a set period of time.

Term loans usually last between one and ten

years, but may last as long as 30 years in

some cases. Term loan is a loan made by

bank/financial institution to a business having

an initial maturity of more than one year.

Differed Credit

• A deferred credit could mean money

received in advance of it being earned, such

as deferred revenue, unearned revenue, or

customer advances. A deferred credit could

also result from complicated transactions

where a credit amount arises, but the

amount is not revenue.

• A deferred credit is reported as a liability

on the balance sheet. Depending on the

specifics, the deferred credit might be a

current liability or a noncurrent liability. In

the past, it was common to see a

noncurrent liability section with the

heading Deferred Credits.

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