Factors Determining Long-Term Financial Requirements

Topics: Finance, Debt, Time Pages: 8 (2018 words) Published: February 3, 2011
Factors determining long-term financial requirements
* Nature of Business
* Nature of goods produced
* Technology used
Types of Long Term Financing
The kind of long term financing that is provided to a particular company depends on its type. For example, the long term financing that is provided to a solo proprietorship is different from the long term financing that a partnership would receive.

Uses of Long Term Financing
Long term financing is used in separate ways by different types of business entities. The business entities that are not corporations are only supposed to use long term financing for the purposes of debt. However, the corporations can use long term financing for both debt and equity purposes.

Sources of Long Term Financing
a. Shares:
These are issued to the general public. The holders of shares are the owners of the business. These may be of two types: (i) Equity and (ii) Preference.

b. Debentures:
These are also issued to the general public. The holders of debentures are the creditors of the company.

c. 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.

d. 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.

e. 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.

f. Loan from financial institutions: There are many specialized financial institutions established by the Central and State governments which give long term loans at reasonable rate of interest.

Long Term Financing Products
The following products are provided as part of long term financing services: * Debentures
* Interest Rate Swaps
* Secured Notes
* Forward Rate Agreements (FRA's)
* Unsecured Notes
* Interest Only Futures
* Convertible Notes
* Option on Future Contracts
* Fixed Deposit Loans
* Subordinated Debt
* Mortgages
* Preference Shares
* Euro-issues

are long-term Debt Instrument, which is not backed by Collaterals. Debentures are unsecured debt backed by the creditworthiness and reputation of the Debenture issuer and documented by an agreement called an indenture.

Debentures are issued usually by large, financially strong companies with excellent bond ratings. One example of debenture is an unsecured bond.

Debentures are long-term Debt Instrument issued by governments and big institutions for the purpose of raising funds. Debentures have some similarities with Bonds but the terms and conditions of securitization of Debentures are different from that of a Bond. A Debenture

is regarded as an unsecured investment because there are no pledges (guarantee) or liens available on particular assets. Nonetheless, a Debenture is backed by all the assets which have not been pledged otherwise.

Normally, Debentures are referred to as freely negotiable Debt Instruments. The Debenture holder functions as a lender to the issuer of the Debenture. In return, a specific rate of interest is paid to the Debenture holder by the Debenture

issuer similar to the case of a loan. In practice, the differentiation between a Debenture and a Bond is not observed every time. In some cases, Bonds are also termed as Debentures and vice-versa. If a bankruptcy occurs, Debenture holders are treated as general creditors

The Debenture issuer has a substantial advantage from issuing a Debenture because the particular assets are kept without any encumbrances so that the option is open for issuing them in future for financing purposes

Swap may be explained as an agreement occurring between two contracting investors. Swaps occur when there is an exchange of streams of cash flow among the contracting...
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