The two main sources of long term finance are as follows:
(A) Ownership Capital
- Equity share capital
- Preference share capital
- Retained earnings
(B) Borrowed Capital
- Term loans
1. Equity share capital:
It represents the investment made by the owners of the business. They enjoy the rewards and bear the risks of ownership. They are paid dividends only after paying dividends to preference shareholders and after meeting the future investment needs of the organization.
2. Preference share capital:
It represents the investment made by preference shareholders. Preference shareholders as the name suggest enjoying preference overpayment of dividend. The dividend paid on these shares is generally at a fixed rate.
3. Retained earnings:
It represents the earnings not distributed to shareholders. A firm may retain a portion or whole of its profits and utilize it for financing its projects.
Debenture capital is a financial instrument for raising long term debt capital. A debenture holder is a creditor of the company. A fixed-rate of interest is paid on debentures. It may be convertible or Nonconvertible.
Non-convertible debentures – these are straight debt instruments carrying a fixed rate and have a maturity period of 5-9 years. If interest is accumulated it has to be paid by the company by the liquidation of its assets. It is an economical method of raising funds. Debenture holders do not have any voting rights and there is no dilution of ownership. They cannot be converted into equity shares.
Convertible debentures – convertible debentures are debentures that are convertible wholly or partly into equity shares after a fixed period of time.
2. Term loans from banks: Many industrial development banks, cooperative banks, and commercial banks grant medium-term loans for a period of three to five years. Commercial banks usually provide short-term finance to business firms in the form of loans and advances, cash credit, overdraft, etc. But nowadays, most of the commercial banks have also started term lending (long and medium-term) and providing need-based finance of different time periods to firms of all sizes.
3. Loan from financial institutions: There are many specialized financial institutions established by the Central and State governments which give long-term loans at a reasonable rate of interest. Some of these institutions are Industrial Finance Corporation of India (IFCI), Industrial Development Bank of India (IDBI), Industrial Investment Bank of India (IIBI), Infrastructure Development Finance Company Ltd. (IDFC), Small Industries Development Bank of India (SIDBI), State Industrial Development Corporations (SIDCs), Industrial Credit and Investment Corporation of India (ICICI), Unit Trust of India (UTI), State Finance Corporations (SFCs), etc. The main functions of these institutions are:
(i) to grant loans for a longer period to the industrial establishment;
(ii) to help the establishment of business units that require a large number of funds and have a long gestation period;
(iii) to provide support for the speedy development of the economy in general and backward regions in particular;
(iv) to offer specialized services operating in the areas of promotion, project assistance, technical assistance services, and training and development of entrepreneurs;
(v) to provide technical and professional management services and help in the identification, evaluation, and execution of new projects.
4. Foreign Sources: Foreign Sources also play an important part in meeting the long-term financial needs of the business in India. These usually take the form of (1) external borrowings; (2) foreign investments and; (3) deposits from NRIs.