Long term financing is a form of financing that is provided for a period of more than a year.

Long term financing services are provided to those business entities that face a shortage of
capital.There are various long term sources of finance.
Purpose of Long Term Finance:
To finance fixed assets.
To finance the permanent part of working capital.
Expansion of companies.
Increasing facilities.
Construction projects on a big scale.
Provide capital for funding the operations. This helps in adjusting the cash flow.
The corporations can use long term financing for both debt and equity purposes.
Sources of Long Term Financing:
Following are the various sources of long term finance are as follows
Shares: These are issued to the general public. The holders of shares are the owners of the
business. These may be of two types:
Equity shares and
Preference shares.
Debentures: These are also issued to the general public. The holders of debentures are the
creditors of the company.
Public Deposits: General public also likes to deposit their savings with a popular and well
established company which can pay interest periodically and pay-back the deposit when due.
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.
Term Loans from Banks: Many industrial development banks, cooperative banks
and commercial banks grant medium term loans for a period of 3-5 years.
A. Debt financing
The act of a business raising operatingcapital or other capital by borrowing. Most often, thi
s refers to the issuance of a bond,debenture, or other debtsecurity. In exchange for lendin
g the money, bondholders and others become creditors of the businessand are entitled to
the paymet of interest and to have their loan redeemed at the end of a given period.
-Financial leverage is the degree to which a company uses fixed-income securities such
as debt and preferred equity. The more debt financing a company uses, the higher
its financial leverage.
a) Bonds
The interest rate companies pay bond investors is often less than the interest rate they
would be required to pay to obtain a bank loan.
Issuing bonds also gives companies significantly greater freedom to operate as they see
fit - free from the restrictions that are often attached to bank loans.
b) Bank loans
Debt Advantages

Debt financing allows you to pay for new buildings, equipment and other assets used to grow
your business before you earn the necessary funds. This can be a great way to pursue an
aggressive growth strategy, especially if you have access to low interest rates.
Closely related is the advantage of paying off your debt in installments over a period of time.
Relative to equity financing, you also benefit by not relinquishing any ownership or control of the
business.
Debt Disadvantages
The most obvious disadvantage of debt financing is that you have to repay the loan, plus
interest. Failure to do so exposes your property and assets to repossession by the bank.
Debt financing is also borrowing against future earnings. This means that instead of using all
future profits to grow the business or to pay owners, you have to allocate a portion to debt
payments
B. Equity Financing
Is the method of raising capital by selling company stock to investors. In return for
the investment, the shareholders receive ownership interests in the company.
Equity financing involves not just the sale of common equity, but also the sale of other equity or
quasi-equity instruments such as preferred stock, convertible preferred stock and equity units
that include common shares and warrants.
Equity Advantages
Equity financing doesn't have to be repaid. Plus, you share the risks and liabilities of company
ownership with the new investors. Since you don't have to make debt payments, you can use
the cash flow generated to further grow the company or to diversify into other areas.
Maintaining a low debt-to-equity ratio also puts you in a better position to get a loan in the
future when needed.
It's less risky than a loan because you don't have to pay it back, and it's a good option if you
can't afford to take on debt.
You tap into the investor's network, which may add more credibility to your business.
Investors take a long-term view, and most don't expect a return on their investment
immediately.
You won't have to channel profits into loan repayment.
You'll have more cash on hand for expanding the business.
Equity Disadvantages
By taking on equity investment, you give up partial ownership and, in turn, some level of
decision-making authority over your business
Debt Versus Equity
Bonds are debt, whereas stocks are equity. This is the important distinction between the

two securities. By purchasing equity (stock) an investor becomes an owner in a corporation.

Ownership comes with voting rights and the right to share in any future profits. By purchasing
debt (bonds) an investor becomes a creditor to the corporation (or government). The primary
advantage of being a creditor is that you have a higher claim on assets than shareholders do:
that is, in the case of bankruptcy, a bondholder will get paid before a shareholder. However, the
bondholder does not share in the profits if a company does well - he or she is entitled only to
the principal plus interest.
To sum up, there is generally less risk in owning bonds than in owning stocks, but this comes at
the cost of a lower return.
C. Hybrid Financing
1. Preference Shares
2. Leases
There are two primary types of leases: capital and operating.
Capital leases are non-cancelable, and must meet at least one of the following
requirements:
-the lease transfers ownership of the asset, the lease contains a bargain purchase option
-the duration of the lease is 75% or more of the asset's expected economic life
-and/or the lease is worth at least 90% of the asset's value.
An operating lease is one that meets none of the criteria. An operating lease is not
capitalized; it is accounted for as a rental expense in what is known as "off balance sheet
financing."
A sale and leaseback is an arrangement where an entity sells one of its assets to a
lender and then immediately leases it back for a guaranteed minimum time period. By
doing so, the entity obtains cash from the sale of the asset that it may be able to use
more profitably elsewhere, while the lender obtains a guaranteed lease. The downside
from the perspective of the seller is that the seller can no longer charge off any
depreciation expense related to the asset in question, which reduces the related tax
benefit.
A sale and leaseback is typically used for a building, but can also be arranged for other
large assets, such as production machinery.
Direct Lease A lease arrangement between a non-manufacturer or non-dealer and
a customer wherein the lessor acquires equipment for the purpose of leasing it and
generating revenue through interest payments.