07-06-2012, 04:48 PM
Sources of Long-term Finance
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Introduction
As you are aware finance is the life blood of business. It is of vital
significance for modern business which requires huge capital. Funds
required for a business may be classified as long term and short term.
You have learnt about short term finance in the previous lesson. Finance
is required for a long period also. It is required for purchasing fixed
assets like land and building, machinery etc. Even a portion of working
capital, which is required to meet day to day expenses, is of a permanent
nature. To finance it we require long term capital. The amount of long
term capital depends upon the scale of business and nature of business.
Long Term Finance – Its meaning and purpose
A business requires funds to purchase fixed assets like land and building,
plant and machinery, furniture etc. These assets may be regarded as the
foundation of a business. The capital required for these assets is called
fixed capital. A part of the working capital is also of a permanent nature.
Funds required for this part of the working capital and for fixed capital
is called long term finance.
To finance the permanent part of working capital:
Business is a continuing activity. It must have a certain amount of
working capital which would be needed again and again. This part
of working capital is of a fixed or permanent nature. This
requirement is also met from long term funds.
Nature of goods produced:
If a business is engaged in manufacturing small and simple articles
it will require a smaller amount of fixed capital as compared to
one manufacturing heavy machines or heavy consumer items like
cars, refrigerators etc. which will require more fixed capital.
Loan from financial institutions:
There are many specialised financial institutions established by
the Central and State governments which give long term loans at
reasonable rate of interest. Some of these institutions are:
Industrial Finance Corporation of India ( IFCI), Industrial
Development Bank of India (IDBI), Industrial Credit and Investment
Corporation of India (ICICI), Unit Trust of India ( UTI ), State
Finance Corporations etc. These sources of long term finance will
be discussed in the next lesson.