Finance is the lifeblood of business. It is of vital significance for a modern business that requires huge capital. Funds required for a business may be classified as long term and short term. Finance for a long period is required for purchasing fixed assets like land and building, machinery, etc. Even a portion of working capital, which is required to meet day to day expenses, is of a permanent nature. To finance it we require long-term capital. The amount of long term capital depends upon the scale of business and nature of business.
Features of Long-term finance
- It involves financing for fixed capital required for investment in fixed assets
- It is obtained from the Capital Market
- Long term sources of finance have a long term impact on the business
- Generally used for financing big projects, expansion plans, increasing production, funding operations.
Long-term finance- it’s meaning and purpose
A business requires funds to purchase fixed assets like land and building, plant and machinery, furniture, etc. These assets may be regarded as the foundation of a business. The capital required for these assets is called fixed capital. A part of the working capital is also of a permanent nature. Funds required for this part of the working capital and for fixed capital is called long term finance.
Purpose of long term finance:
The long term finance is required for the following purposes:
1. To finance fixed asset:
Business requires fixed assets like machines, buildings, furniture, etc. The finance required to buy these assets is for a long period because such assets can be used for a long period and are not for resale.
2. To finance the permanent part of working capital:
Business is a continuing activity. It must have a certain amount of working capital which would be needed again and again. This part of working capital is of a fixed or permanent nature. This requirement is also met from long term funds.
3. To finance growth and expansion of business:
Expansion of business requires an investment of a huge amount of capital permanently or for a long period.
Factors determining Long-term capital finance
The amount required to meet the long-term capital needs of a company depends upon many factors. These are:
(a) Nature of Business: The nature and character of a business determine the amount of fixed capital. A manufacturing company requires land, building, machines, etc. So it has to invest a large amount of capital for a long period. But a trading concern dealing in, say, washing machines will require a smaller amount of long-term funds because it does not have to buy buildings or machines.
(b) Nature of goods produced: If a business is engaged in manufacturing small and simple articles it will require a smaller amount of fixed capital as compared to one manufacturing heavy machines or heavy consumer items like cars, refrigerators, etc. which will require more fixed capital.
(c) Use of Technology: In heavy industries like steel the fixed capital investment is larger than in the case of a business producing plastic jars using simple technology or producing goods using labor-intensive techniques.