Introduction to Financial Analysis & Management
Present study deals with the external financial resources for a quoted or listed company. Finance is a basic requirement for any business among the other resources. Also finance plays a crucial role while making decisions for expansion. Source of long-term finance refers to the agencies or institutions from or through which finance for a longer time period can be raised. In case of a sole proprietary firm and partnership concerns, long-term funds are provided by the owners themselves or through the retained profits of the business. But, it is not the case with a quoted firm. In case of companies having financial requirement significantly large, financing can be raised with different long term sources Assignment help.
Aim of this work is to comprehend different sources of long term finance for a listed firm on any stock exchange, which is planning for overseas expansion of the business. In the first section of the present report, a general approach to the different long term sources of finance will be presented. Further, four major external sources of finance, so that an effective long-term capital structure can be built for any company to expand its business into foreign market.
A quoted company is a firm having its stock available for trading on exchange or a Company whose stocks is actively traded on any recognized stock exchange national, regional or international. Long term financing for any quoted company comes majorly from the common equity shares or preference share and loan capital. In the present report we will discuss long term sources of finance for overseas expansion project available externally with a hypothetical automobile manufacturing firm. Origin of the firm is say in London and it is currently being listed on London Stock Exchange (LSE). Its capital structure currently is not a geared one i.e. no debt financing is there in the company’s capital structure. In equity financing, both preference and common share are there in the company’s capital structure. Further, part of the long term financing comes from the retained earnings. Our concern here is only for the external long term financing.
Financial resources refers to the venues through which a business or company get its finance. For example, financial resources can be Bank loan, Mortgage loans, Debenture issues, Bond issues, equity finance, etc. Financial resources are among the key requisites of any business. Financial resources can be for arranging finance either for long or short term for the company. Generally, financing can be segregated in three heads on the basis of time frame or requirement, namely short term, long term and middle term financing. Short term finance sources are better known as quick solution for temporary financial problems (Bendrey and West, 1996). For a general company, short term sources of finance can be in the form of bank over draft, bill discounting, trade credits etc. The middle term financing can be raised through lease, hire purchase, factoring etc. Long term finance sources refer means the finance coming through much reliable and authentic source such as the shareholders, creditors, banks, government etc. Here, the discussion will be restricted for the external long term sources of finance for a listed firm (Type of financing, n.d).
Sources of Long-Term Finance:
Long term sources of finance are those that are needed over a longer period of time - generally over a year. Long-term sources of finance are specially considered in case of any firm’s plans for taking a bigger step, like expansion, diversification or acquisition of some fixed assets ect. The methods of financing these types of projects will generally be quite complex and can involve billions of pounds. Generally these sources are used by a firm when it requires funds the entire life of a business more than one year time period (Thorn Lack 1977). A large number of long term sources of finance source are available including bank loan, common equity share, retain earning, debentures etc. Below are discussed the general long term finance sources for any profit making venture:
- Owner's Capital: It is the most general source of long term finance in case of sole proprietorship or partnership firms. People with a fortunate position of holding sizable funds that can be used for setting up a profit making venture can chose this as the key source for long term finance. Funds will be generated through individual or family savings, inheritance or money received as the result of a redundancy payments. Main advantage of this finance is not having any cost.
- Loans: Bank loans are just not a source of short term finance, but are also an important source of long term finance for business. Such institutions lend sums for long periods of time probably over 25 years or even more. Such source of finance charges in terms of a rate of interest, which can vary according to the bank regulatory bodies (central bank). Using bank loan financing for business is relatively easy but the administration cost of the loan can be considerably high (Hoelscher, 2006). Some times for seeking such finance.
- Share Capital: A share is a part ownership in a business. Generally, shares are related with companies incorporated as public limited companies or private limited companies. This is among the key sources of long-term financing that any company can use to increase funds in the business externally. Also for raising new or further funds, shares are considered the most reliable source.
- In present study, we have considered only share financing in the hypothetical company. For issuing share to general investors, a firm needs to get listed on any registered stock exchange. A quoted company can issue two sorts of shares; one is common equity Share and another is Preference Shares. in the former one the holder of the share has rights to participate and vote in company meetings and other activities, whereas the holder of preference shares has no such rights but has a privilege to get fixed dividend before ordinary share holders. Share financing is a permanent source of fund and in the case of ordinary shares the companies have to pay only dividends if there is any profit (Chandra, 2008). If any business wishes to expand, it has choice of issuing more shares with a limitation for the target buyers of the new issue.
- Debentures: Debentures are in a documentation format of loan including the stamp of the company, which carries a promise from the company side to the debenture holder for having return on a fix rate motioned in the certificate. Principal amount will be paid at the maturity (Business Teacher, n.d). The holder of debenture has only right to have the interest payments but no other rights such as to attend company’s general meetings or voting. Usually the debentures are negotiable and freely exchangeable instruments.
- Venture Capital: Venture capital financing has gained popularity in the last decade. It has become a more and more important source of long term finance for growing companies. Venture capitalists groups are made up of individuals or companies having considerable spare money, which are particularly set up for investing in the developing companies. In return the venture capitalist gets share both in the running of the company as well as in the profits reaped.
- Special Financial Institutions: There exist different institutions set up by the state and central governments, like Development Banks or Growth monetary institutions to provide the long-term finance for company unions (Bernstein, 2004).
From the above entire discussion, it can be concluded that many long term financial sources for the company irrespective of internal and external are available. Firms have a greater choice for financing its activities. Also, the critical evaluation of the four best external sources of long term finance for the company advocates the use of Euro bond issue and venture capital financing for hypothetical Company. After having a look on above it would be much easier to make decision about choosing a right source for finance. Company should use all these sources in such a way that the debt equity ration should be equal in form of 1:1 than it would be considered as an effective long term capital structure. Read more about Analysis and Study of Applied Management.
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