Long-Term Finance Sources: Equity, Preference Shares, Debentures, Venture Capital, Lecture notes of Finance

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LONG TERM FINANCE

Prepared by Dr. Santosh Solanki LNCT-MBA

Meaning:-

The Sources of Long Term Finance are those sources from where the funds are raised for a longer period of time, usually more than a year. Long term financing is required for modernization, expansion, diversification and development of business operations.

Long Term Sources of Finance

ØWhich are not preference shares

ØAlso called ordinary shares and

holders are real owners of the company.

Ø“A share is a share in the share capital

of the co.”

ØIt can be issued at discount, premium

or at face value.

Equity shares

No claim on income

No claim on assets

Right to control Voting right

Pre-emptive right

Limited liability

Transfer of shares

Features

High risk

Due to pre-emptive right

management of the co. may be concentrated in few hands

No trading on equity

Disadvantages

§ Enjoys preferential rights over

equity shares in - payment of dividend and - repayment of capital

§ Considered as hybrid security

Preference Shares

§ Cumulative and non cumulative

§ Participating and non participating

§ Redeemable and irredeemable

§ Convertible and non convertible

Types

Appeal to cautious investors – who

seek reasonable safety and return

No obligation for dividend

No interference in management

No charge on assets

Flexibility

Variety

Advantages

§ A debenture is a certificate or

document issued by a company under its seal as an acknowledgement of debt.

§ Repayment is at winding up or

maturity.

§ Reward is known as interest at fixed

rate.

Debentures

vDebentures represents borrowed capital vInterest on debentures is payable on a fixed rate vInterest on debentures is an obligation to the co. vDebenture holders are creditors to the company vDebenture holders have no voting rights vDebentures may involve a charge on assets of the co. vflexibility

Features

No voting rights

Fixed interest

Debenture interest is an expense to

the co.

Can be redeemed

Trading on equity is possible

Advantages

Interest is an obligation to the

company

Creates a charge on company’s

assets

Common people can not buy

debentures as they are of high denominations

Disadvantages

 It is often used for growth and expansion of new and young enterprises.  Generally considered as high risky capital  Venture capitalist will involve in the management of the enterprise.  They generally support to proven technologies. Venture capital

Equity participation

Long term investment

Participation in management

Features