A business or company in order to run for extended period of time needs permanent source of capital or finance on which it can bank on in time of need. Long term sources of finance are those which reaming with the business for a long period of time and the company has to repay it after few years and not immediately. Given below are some of the important long term sources of finance –
- Equity share capital – It is the first source of finance which any company would look before starting the business as equity share capital is the best option when it comes to having permanent source of capital as equity shareholders are not interested in dividends rather they are interested in capital appreciation over a period of time.
- Preference share capital – It represents those people who are more interested in timely payment of dividend than capital appreciation and in the event of liquidation they are paid out first and then only equity shareholders get paid.
- Retained Earnings – These represents those earnings which the company has accumulated over the years and therefore it can be said to be savings of the company as it can be used by the firm whenever it requires funds for expansion or any other purpose
- Debentures and Bonds – Debentures and bonds are debt instruments which are issued by the company to the investors who do not want to take risk associated with equities and want constant income in the form of interest and safety of their principal amount.
- Loan from financial institutions – When the firm takes loan from banks or financial institutions which are repayable after 3 or 5 years then it is classified as long term source of finance because company has to pay regular interest only, principal amount has to be repaid on maturity and not before that.
- Venture capital funding – There are many wealthy individuals who are willing to take the risk and invest in a start up business if they like the idea and these individuals do not demand their money rather they wait for the right time which is when company become successful and then they get out of the company either through taking the company public or demanding money.
Apart from above there are other sources as well like asset securitization, foreign currency loans etc…, which can be considered as long term sources of finance.