Sources of Long-Term Financing

There are multiple sources of long-term financing. Some of the major sources are mentioned below,

1. Equity Capital: This equity loan or capital represents the fund raised by a company using either IPO (initial public offering) or a private investor. In both the public and private routes, the ownership of the company is diluted. However, the controlling power lies with the largest equity holder. There is no preferential right given to the equity holders and they face the highest risk among all the shareholders. This is a zero-interest long-term financing where the investors receive returns against their investment. Further, the equity holders receive a higher rate of return compared to the debt holders as they face maximum risk during repayment of their invested fund.

2. Preference Shares: Another source of long-term financing for a corporation is the preference share capital. Investors invest in these forms of shares as they have the opportunity to receive returns. Here, the preference shareholders possess preferential rights when receiving dividends and lower risk than the equity shareholders. The dividends are paid at a fixed rate and the full payment of funding is given to the preference shareholders when a company winds up their business.

3. Debentures: These are some of the commonly used financial instruments for long-term financing. Debentures are generally issued by an organization, having a fixed rate of interest, and thus the market fluctuations do not hamper the transactions for this source. These can be used for purchasing bonds or real estate whose value increases with time. Debentures can also be used as short-term financing in case of buying shares of a company or bank. Further, debentures are considered better than other financial instruments due to their liquidity, flexibility, and cover against inflation.

4. Term Loans: A loan that offers a fixed repayment period ranging from five to ten years, is termed the term loan. These are usually used to fund large projects or invest in capital expenditures such as purchasing machinery and equipment and renovations. Term loans can also be used for short-term needs such as repaying existing debt before its final repayment period.

5. Retained Earnings: It is also termed as plough-back profits. The source is a beneficial one as no charges are included in it. The profits that the company earns are used for financing its debt, paying off investors, or offering stock options to its employees. Retained earnings can be used to expand the business after repaying all the dividends and interest charges. This is a safe option as no burden of debt relies on and no dilution of ownership exists. They impact the equity share valuation and form a portion of the net worth of the company.