08-16-2017, 10:36 PM
Sources of Long-term Finance
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Introduction
As you are aware finance is the life blood of business. It is of vital
significance for modern business which requires huge capital. Funds
required for a business may be classified as long term and short term.
You have learnt about short term finance in the previous lesson. Finance
is required for a long period also. It 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.
Long Term Finance Its 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.
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.
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.
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.