Source of Finance : Long-Term Source

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:
Long term finance is required for the following purposes:
1. To Finance fixed assets :
Business requires fixed assets like machines, Building, furniture
etc. 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 investment of a huge amount of
capital permanently or for a long period.

The main sources of long term finance are as follows:

1. Shares:
These are issued to the general public. These may be of two types:
(i) Equity and (ii) Preference. The holders of shares are the owners
of the business.
2. Debentures:
These are also issued to the general public. The holders of
debentures are the creditors of the company.
3. Public Deposits :
General public also like to deposit their savings with a popular
and well established company which can pay interest periodically
and pay-back the deposit when due.
4. Retained earnings:
The company may not distribute the whole of its profits among its
shareholders. It may retain a part of the profits and utilize it as
capital.
5. 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.
6. Loan from financial institutions:
There are many specialised financial institutions established by
the Central and State governments which give long term loans at
reasonable rate of interest. Some of these institutions are:
Industrial Finance Corporation of India ( IFCI), Industrial
Development Bank of India (IDBI), Industrial Credit and Investment
Corporation of India (ICICI), Unit Trust of India ( UTI ), State
Finance Corporations etc. These sources of long term finance will
be discussed in the next lesson.