Sources of long term finance

Long-term finance refers to the funds that are raised for a period exceeding one year, typically used for capital expenditures, expansion, or other projects that have a long-term horizon. Here are common sources of long-term finance:

1. Equity shares

– Companies can raise long-term capital by issuing equity shares. Investors who buy these shares become partial owners of the company.

  1. Preference Shares:

  – Preference shares represent ownership in a company but typically do not have voting rights. They offer a fixed dividend, making them a source of long-term financing.

  1. Debentures/Bonds:

   – Companies can issue debentures or bonds to raise long-term funds. These are debt instruments with fixed interest payments and a maturity date when the principal is repaid.

4. Long term loans from Financial Institution

– Borrowing from financial institutions, such as banks or specialized lending institutions, is a common source of long-term finance. These loans may have a fixed or variable interest rate.

  1. Public Deposits:

   – Certain companies, especially non-banking financial companies (NBFCs), can raise funds through public deposits. This involves individuals depositing money with the company for a fixed period.

  1. Retained Earnings:

   – Companies can use profits earned in previous years that were not distributed as dividends (retained earnings) for financing long-term projects.


7. Venture capital

 – Start-ups and companies with high growth potential may attract funds from venture capitalists in exchange for equity ownership. Venture capital is often associated with high-risk, high-return investments.

  1. Private Equity:

   – Private equity involves raising funds from private investors or institutions to acquire or invest in established businesses. It often involves a significant ownership stake in the target company.

  1. Government and Institutional Financing:

   – Governments and certain institutions provide long-term financing for specific projects, especially in sectors like infrastructure. This can include loans, grants, or subsidies.

10. Lease Financing

– Companies can use lease financing to acquire assets without an outright purchase. This allows them to use the asset while making regular lease payments.

  1. International Financing:

    – Companies can raise funds by issuing bonds or equity on international markets. This is common for large multinational corporations.

  1. Grants and Subsidies:

    – Certain projects may receive grants or subsidies from the government or international organizations. While not a traditional form of finance, these funds contribute to project capital.

13. Convertible Debenture

– Convertible debentures are debt instruments that can be converted into equity shares at a later date. This provides flexibility for both the issuer and the investor.

  1. Term Loans from Commercial Banks:

    – Commercial banks offer term loans with a fixed repayment schedule to businesses for financing long-term projects. The interest rate may be fixed or floating.

  1. Foreign Direct Investment (FDI):

    – FDI involves obtaining capital from foreign investors in exchange for ownership stakes in the company. This is common in sectors where foreign participation is allowed.

Choosing the right source of long-term finance depends on factors such as the nature of the project, the financial health of the company, the cost of capital, and the risk appetite of investors. Companies often use a mix of these sources to meet their long-term funding needs.