The long-Term capital consist of borrowed monies which will remain in the company for five or more years, and sometimes carries the option of being converted into ordinary share capital at the discretion of the lender. Normally, long-term loans are secured by charges on the fix assets of the borrowing concern, so that if things do not go well, the lenders are certain of recovering their money through the sale of the fixed assets if necessary. Only some most successful organisations are able to get loans without this type of security. Because lenders feel that their money is safe with them and that the conditions on which it was lent will be honoured in full. Some most successful company like TESCO or GEC are able to raise loans without these types of security.
Loans may be raised through the stock market, particularly if they are to be convertible loans. It may be possible to raise loans from one of the banks, such as Barclays, Lloyds, Midland, HSBC, NatWest, but they are not provider of venture capital ant they too look for high security while they lend money.
Merchant banks are more likely source of long-term capital. They specialise more in the provision of venture capital but they still demand an extremely close look at an organisation's prospects and security before lending. Investors in Industry are the biggest supplier of venture capital in the UK.
The pension funds always look for good investment opportunities, but they too look for safe investment. They always look for better dividend received and capital growth. The Business Expansion Scheme is also there to bring together organisation that required capital and those prepared to provide it.
But it should be remembered that wherever the capital is obtained, it should be safe and secure. The less security there is, the higher the charge for money is. And borrowed money can be used either externally or internally. Whatever is done must be perceived to be to the benefit of the borrowing organisation.
Below are the various forms of long-term and medium-term funds.
DEBENTURE:-
Debenture can be defined as 'Any form of borrowing that commits a firm to pay interest and repay capital. In practice, usually applied to long-term loans those are secured on a firm's assets.' Debenture is a certificate issued by a company acknowledging a debt. A loan raised by a company, paying a fixed rate of interest and secured on the assets of the company. A fixed interest stock (bond) secured on the assets of a company. In the event of the liquidation of the company, the owners of the debentures would be paid before the holders of loan stock, preference shares and ordinary shares but after the Inland Revenue, the liquidator and the banks.
ADVANTAGES
Bonds and debentures are usually much more rewarding then government bonds or bank investments and provide a higher rate of financial return for their investors. Another great advantage to debentures is that at the end of the lending period companies usually offer the assets in the form of stock, which can ultimately be very valuable. Stocks are another great form of investment and are sometimes better than receiving immediate cash in return.
LIMITATIONS
Debentures and bonds hold greater risks because the company could eventually go out of business, so this type of investment should be done very carefully. Debentures can be a very attractive form of investment, but only should be taken advantage of with companies that have a very high probability of being successful. Large and already successful businesses are smart forms of investments when considering buying corporate debentures.
CONVERTIBLE DEBENTURE
Debenture which can be converted into stock at the option of the holder and /or the issuer at a specified date in the future. Because the buyer has the ability to convert the debenture into stock under certain circumstances, the seller is able to borrow at a lower cost than if the convertibility feature was not present.
ADVANTAGES
A company might issue bonds, using the capital from the bond sales to fund a project. The bondholders could opt to convert their bonds into stock at an agreed-upon price, or to accept repayment of the bond funds. For the seller, this convertible debenture carries a lower interest rate, and for buyers, it carries a
Potentially higher return, as the value of the stock may grow, allowing the buyer to take advantage of the agreed-upon sale price to make a significant profit.
LIMITATIONS
Debentures are unsecured. Buyers rely on the reputation of the issuer to ensure that they will be paid back, rather than having the advantage of a secure backing. If a company fails and the holders of debt instruments have not yet been repaid, they are considered creditors, and they are entitled to some of the funds when a company is liquidated. People who purchase convertible debentures run the risk of not recovering their funds or of a radical decline in stock value which makes conversion inadvisable.
ORDINARY SHARES
Where ownership of a company is divided into a number of equal parts or 'shares', ordinary shareholders are entitled to a distribution of the profits (known as dividends) and have the right to vote at company meetings. If the company is wound up, ordinary shareholders are entitled to any assets left after all other obligations have been met. These residual assets are known as the equity of the company, hence the term 'equities' sometimes used to describe ordinary shares. Ordinary shares rank after debentures and preference shares.
ADVANTAGES
Shareholders have the right to vote. Shareholders have the ability to elect the board of directors. Shareholders are able to buy as many new stocks as possible.
LIMITATION
The limitation of the Ordinary share is that there is no guarantee of dividend. The ordinary shareholder, or equity holders, carry the biggest risk of all those who provide money for an organisation. There is no stated rate of return on their investment, and if the company does not do well, they get no return; they are the last to receive a return on their investment and the last to be paid in the event of failure, ranking after all the other creditors, secured or unsecured.
LOAN
A loan is a type of debt. Like all debt instruments, a loan entails the redistribution of financial assets over time, between the lender and the borrower. In a loan, the borrower initially receives or borrows an amount of money, called the principal, from the lender, and is obligated to pay back or repay an equal amount of money to the lender at a later time. Typically, the money is paid back in regular
Instalments, or partial repayments; in an annuity, each instalment is the same amount.
There are three different types of loan.
(1)Secured loan: - A secured loan is a loan in which the borrower pledges some asset (e.g. a car or property) as collateral for the loan.
(2)Unsecured loan: - Unsecured loans are monetary loans that are not secured against the borrower's assets. These may be available from financial institutions under many different guises or marketing packages.
(3)Demand loan: - Demand loans are short term loans that are atypical in that they do not have fixed dates for repayment and carry a floating interest rate which varies according to the prime rate. They can be "called" for repayment by the lending institution at any time. Demand loans may be unsecured or secured.
ADVANTAGES
In a loan, the borrower initially receives or borrows an amount of money called the principal, from the lender, and is obligated to pay back or repay an equal amount of money to the lender at a later time. Typically, the money is paid back in regular instalments, or partial repayments; in an annuity, each instalment is the same amount. The loan is generally provided at a cost, referred to as interest on the debt, which provides an incentive for the lender to engage in the loan. In a legal loan, each of these obligations and restrictions is enforced by contract, which can also place the borrower under additional restrictions known as loan covenants. Although this article focuses on monetary loans, in practice any material object might be lent.
LIMITATIONS
Predatory lending is one form of abuse in the granting of loans. It usually involves granting a loan in order to put the borrower in a position that one can gain advantage over him or her. Where the moneylender is not authorized, they could be considered a loan shark. Usury is a different form of abuse, where the lender charges excessive interest. In different time periods and cultures the acceptable interest rate has varied, from no interest at all to unlimited interest rates. Credit
Card companies in some countries have been accused by consumer organisations of lending at usurious interest rates and making money out of frivolous "extra charges". Abuses can also take place in the form of the customer abusing the lender by not repaying the loan or with intent to defraud the lender.
MORTGAGE
A mortgage is the transfer of an interest in property (or the equivalent in law - a charge) to a lender as a security for a debt - usually a loan of money. While a mortgage in itself is not a debt, it is the lender's security for a debt. It is a transfer of an interest in land (or the equivalent) from the owner to the mortgage lender, on the condition that this interest will be returned to the owner when the terms of the mortgage have been satisfied or performed. In other words, the mortgage is a security for the loan that the lender makes to the borrower.
ADVANTAGES
In most jurisdictions mortgages are strongly associated with loans secured on real estate rather than on other property (such as ships) and in some jurisdictions only land may be mortgaged. A mortgage is the standard method by which individuals and businesses can purchase. Real estate without the need to pay the full value immediately from their own resources.
LIMITATIONS
A mortgage lender is an investor that lends money secured by a mortgage on real estate. In today's world, most lenders sell the loans they write on the secondary mortgage market. When they sell the mortgage, they earn revenue called service release premium. Typically, the purpose of the loan is for the borrower to purchase that same real estate. The borrower, known as the mortgagor, gives the mortgage to the lender, known as the mortgagee. As the mortgagee, the lender has the right to sell the property to pay off the loan if the borrower fails to pay.
VENTURE CAPITAL TRUST
A Venture Capital Trust or VCT is a highly tax efficient UK closed-end collective investment scheme designed to provide privet equity capital for small expanding companies and capital gains for investors. Venture capital trusts are a form of publicly traded private equity comparable to business development companies in the United States.
ADVANTAGES
Venture capital trusts offer one of the best taxes breaks available - if you can stand the risks involved. Venture capital trusts are funds that invest their cash in small, unquoted firms at an embryonic stage or in shares listed on the Alternative Investment Market (Aim). Venture capital trusts are high-risk investments but the reward is that they offer investors income tax relief of 30% on investments to new shares of up to £200,000.
LIMITATION
The business of providing capital for, and making investments in, small and young companies. Such companies do not have a long trading history, have limited reserves, and are often regarded as high risk.
LEASING
Leasing is a process by which a firm can obtain the use of a certain fixed assets for which it must pay a series of contractual, periodic, tax deductible payments. The lessee is the receiver of the services or the assets under the lease contract and the leaser is the owner of the assets.
ADVANTAGES
For businesses, leasing property may have significant financial benefits: Leasing is less Capital-intensive than purchasing, so if a business has constraints on its capital, it can grow more rapidly by leasing property than it could by purchasing the property outright. Capital assets may fluctuate in value. Leasing shifts risks to the leaser, but if the property market has shown steady growth over time, a business that depends on leased property is sacrificing capital gains. Because of investments which are done with leasing, new businesses are formed. Furthermore, unemployment in that country is decreased.
Leasing may provide more flexibility to a business which expects to grow or move in the relatively short term, because a lessee is not usually obliged to renew a lease at the end of its term. In some cases a lease may be the only practical option; such as for a small business that wishes to locate in a large office building within tight locational parameters. Depreciation of capital assets has different tax and financial reporting treatment from ordinary business expenses. Lease payments are considered expenses, which can be set off against revenue when. Calculating taxable profit at the end of the relevant tax accounting period.
DISADVANTAGES
A net release may shift some or all of the maintenance costs onto the tenant. If circumstances dictate that a business must change its operations significantly, it may be expensive or otherwise difficult to terminate a lease before the end of the term. In some cases, a business may be able to sublet property no longer required, but this may not recoup the costs of the original lease, and, in any event, usually requires the consent of the original lessor. Tactical legal considerations usually make it expedient for lessees to default on their leases. The loss of book value is small and any litigation can usually be settled on advantageous terms. This is an improvement on the position for those companies owning their own property. Although it can be easier for a business to sell property if it has the time, forced sales frequently realise lower prices and can seriously affect book value.
If the business is successful, leasers may demand higher rental payments when leases come up for renewal. If the value of the business is tied to the use of that particular property, the lessor has a significant advantage over the lessee in negotiations.
HIRE PURCHASE
Hire purchase (frequently abbreviated to HP) is the legal term for a contract developed in the United Kingdom and now found in Chine, Japan, India, Australia and New Zealand It is also called closed end leasing. In cases where a buyer cannot afford to pay the asked price for an item of property as a lump sum but can afford to pay a percentage as a deposit, a hire-purchase contract allows the buyer to hire the goods for a monthly rent. When a sum equal to the original full price plus interest has been paid in equal instalments, the buyer may then exercise an option to buy the goods at a predetermined price (usually a nominal sum) or return the goods to the owner.
ADVANTAGES
Two major advantages of Hire Purchase are the avoidance of a major cash outlay at the outset of the project an immediate availability of the asset for use. It can save business money.
LIMITATIONS
If the user fails to fulfil the payment schedule, the owner can repossess the asset. The users then lose the entire asset and obtain no credit for payments already made. And many people may not hire but to buy instead.
GOVERNMENT GRANTS
A government backed loan can simply be defined as a Loan subsidized by the government, which protects lenders against defaults on payments, thus making it a lot easier for lenders to offer potential borrowers lower interest rates. Its primary aim is to make home ownership affordable to lower income households and first time buyers. There are numerous types of government backed loans which vary dependent on the county and status of the borrower.
RETAINED PROFIT
Retained profits refer to the portion of net income which is retained by the corporation rather than distributed to its owners as dividends. Similarly, if the corporation makes a loss, then that loss is retained and called variously retained losses, accumulated losses or accumulated deficit. Retained earnings and losses are cumulative from year to year with losses offsetting earnings.
SHORT TERM FUNDS
The short-Term capital consists of borrowed monies which will remain in the company for less than five years. The banks are the most important source of external finance for small and medium sized firms. Not only smaller firms that tend to rely on short-term finance but firms of all sizes use these sources to varying degrees. For example, most large companies arrange access to overdraft finance to tide them over temporary liquidity shortages. Here are some examples of Short-term finance.
BANK OVERDRAFT
A short-term form of finance obtained normally from a commercial bank that allows customers to spend more money than there is their account. A bank overdraft is when someone is able to spend more than what is actually in their bank account. Obviously the money doesn't belong to them but belongs to the bank so this money will need to be paid back; normally automatically done when money goes into the persons account. The overdraft will be limited. A bank overdraft is also a type of loan as the money is technically borrowed.
ADVANTAGES
An overdraft is flexible - An organisation only borrows what it needs at the time which may make it cheaper than a loan. And an organisation only pays for the funds it uses. It's quick to arrange. There is not normally a charge for paying off the overdraft earlier than expected.
LIMITATION
It has to be rearranged regularly. An arrangement fee is usually payable when credit is extended, perhaps during the term of the facility. It can be called in by the lender at any time. An organisation faces administration fees if they exceed the agreed limit. Overdrafts may be secured against business assets - the lender can take control of these if they don't repay the overdraft. Unlike loans they can only get an overdraft from the bank where they maintain their current account. In order to get an overdraft elsewhere an organisation needs to transfer their business bank
Account. The interest rate applied is nearly always variable, making it difficult to accurately calculate your borrowing costs.
TRADE CREDIT
Trade credit is an arrangement between businesses to buy goods or services on account, that is, without making immediate cash payment. The supplier typically provides the customer with an agreement to bill them later, stipulating a fixed number of days or other date by which the customer should pay.
ADVANTAGES
Reduced capital requirements, this means that if a new business setting up has trade credit, they will obviously require less money in capital to start up the business. This is a major advantage to someone who has very little money but has a good idea about starting a new business. Trade credit with improve the cash flows and therefore provide smoother operation for the business. Business can buy now and pay later which means even if they don't have the money at first they can purchase items, sell them as a business and then make the payments at the end of the month when the products have been sold and a profit has been made. Businesses can look to grow without having to worry of needing to make immediate payments which may set them back. With trade credit, the business can focus on other areas such as sales, marketing and research rather than worrying about meeting targets just to have enough money to pay the bills.
LIMITATIONS
If repayments are not made by certain deadlines, the business will receive a poor credit history which will be a big blow to any business as they will not trusted in the future if they require any loans, trade credit, credit cards or leasing.
Only companies with a good credit history will get trade credit and these can often be hard to build up, especially for new businesses.
INVOICE DISCOUNTING
Invoice discounting is a form of short-term borrowing often used to improve a company's working capital and cash flow position. Invoice discounting allows a business to draw money against its sales invoices before the customer has actually paid. To do this, the business borrows a percentage of the value of its sales ledger from a finance company, effectively using the unpaid sales invoices as collateral for the borrowing. Although the end result is the same as for debt factoring (the business gets cash from its sales invoices earlier than it otherwise would) the financial arrangement is somewhat different.
ADVANTAGES
By receiving cash as soon as a sales invoice is raised, the business will find that its cash flow and working capital position is improved. The business will only pay interest on the funds that it borrows, in a similar way to an overdraft, which makes it more flexible than debt factoring. Invoice financing can be arranged confidentially, so that customers and suppliers are unaware that the business is borrowing against sales invoices before payment is received.
LIMITATIONS
In some industries, financing debts can be associated with a company that is in financial distress. This can result in suppliers becoming reluctant to offer credit terms, which will reverse many of the benefits of the arrangement. Invoice discounting is an expensive form of financing compared to an overdraft or bank loan. As the finance company takes a legal charge over the sales ledger, the business has fewer assets available to use as collateral for other forms of lending - this may make taking out other loans more expensive or difficult. Once a business enters into an invoice discounting arrangement, it can be difficult to leave as the business becomes reliant on the improved cash flow.
FACTORING
Factoring is a financial transaction whereby a business sells its account receivable (i.e., invoice) to a third party (called a factor) at a discount in exchange for immediate money with which to finance continued business. Factoring differs from a bank loan in three main ways. First, the emphasis is on the value of the receivable (essentially financial asset not the firm's credit worthiness. Secondly, factoring is not a loan - it is the purchase of a financial asset (the receivable). Finally, a bank loan involves two parties whereas factoring involves three.
ADVANTAGES
There are many factoring companies, so prices are usually competitive. It can be a cost-effective way of outsourcing your sales ledger while freeing up your time to manage the business. It assists smoother cash flow and financial planning. Some customers may respect factors and pay more quickly. An organisation may be given useful information about the credit standing of their customers and they can help an organisation to negotiate better terms with their suppliers. Factors can prove an excellent strategic - as well as financial - resource when planning business growth. Cash is released as soon as orders are invoiced and is available for capital investment and funding of your next orders.
LIMITATIONS
The cost will mean a reduction in the company's profit margin on each order or service fulfilment. It may reduce the scope for borrowing - book debts will not be available as security. Factors may want to vet your customers and influence the way that you do business. It may be difficult to end an arrangement with a factor as you will have to pay off any money they have advanced you on invoices if the customer has not paid them yet. Some customers may prefer to deal directly with you. How the factor deals with your customers will affect what your customers think of you. Make sure you use a reputable company that will not damage your reputation. You have to pay extra to remove your liability for bad debtors.
