Businesses face with financial difficulties and they have to find appropriate sources of long term finances to overcome difficulties. There are many long term sources of finance available such as:
01. Share capital
The company can issue shares ordinary shares and preferred shares. When issuing ordinary shares, those can be issued with or without voting rights. The ordinary share issue can be a fresh share issue or a right issue where existing shareholders get a right to purchase new shares based on their shareholding in the company. For the finances obtained company has to pay dividends to the investors in return.
02. Retained earnings
The undistributed profits that are accumulated over years can be used as long term source of finance. Use of retained earnings to finance will have no cost to the firm except for shareholder dissatisfaction due to non-receipt of return during the period.
03. Debentures
Debentures are defined as a loan that is secured and it carries a fixed or a floating charge. Debentures are considered to be unsecured credit and investors invest in debentures mainly due the reputation of the company. Debenture certificate acknowledges that firm has obtained the loan and will repay on promised date.
04. Bonds
Bond is source of finance which is obtained for more than one year period. Bonds can be traded before the maturity and bondholders are considered to be secured creditors of the company. In general, bondholder can earn interest on principal and capital gain for holding it till maturity. Ex: corporate bonds, foreign currency bonds. (Refer the article Types of bonds to know about bonds)
05. Borrowings from banks
Business organizations can obtain loans from commercial banks and other financial institutions. The lending bank might ask for a security and the borrowing bank will have to pay interest based on a fixed or a floating rate. These kind of lending are based on trust and understanding between bank and the organization.
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