Every business enterprise whether new or already established would need finance for its various programs like new project implementation, expansion, modernization, etc. In our previous article, we talked about Short Term Financing, which is an option for getting finance for your project.
At the same time, there are several sources of finance available to a business enterprise, which source of finance should be resorted for raising funds shall be decided by the type of requirements for which fund is needed by the business enterprise.
This article will focus on what long term financing is and the different sources of long term financing that are available for your business.
- What is Long Term Financing?
- What are the 5 Main Sources of Finance?
- What are the Sources of Long-Term Financing?
- What are the 4 Common Sources of Financing?
- What are the 3 Major Types of Long Term Funds?
- What are the 10 Sources of Finance?
- What are the Five Characteristics of Long Term Debt Financing?
- Pros and Cons of Long-Term Bank Loans
- What are the Uses of Long Term Financing?
- What are the Features of Long Term Financing?
- What are Long Term Financial Assets?
- What is Long Term Investment?
What is Long Term Financing?
Long term financing means financing by loan or borrowing for more than one year by issuing equity shares, a form of debt financing, long-term loans, leases, or bonds. It is usually done for big projects, financing, and company expansion. Such long-term financing is generally of high amount.
- The fundamental principle of long-term finances is to finance the strategic capital projects of the company or to expand the company’s business operations.
- These funds are normally used for investing in projects that will generate synergies for the company in the future years.
- E.g.: – A 10-year mortgage or a 20-year lease.
Long-term financing is a mode of financing that is offered for more than one year. It is required by an organization during the establishment, expansion, technological innovation, and research and development.
Read Also: What is Cost Benefit Analysis?
In addition, long-term financing is required to finance long-term investment projects. Long-term funds are paid back during the lifetime of an organization.
What are the 5 Main Sources of Finance?
Are you going to take a startup business and looking for a reliable source to get finance? However, the best strategy is to use multiple sources of finance for your business startup because it will provide you with good support in your downturn time. Which source of finance do you prefer to use?
It may be getting commercial bank loans, credit unions, venture capital, or others. Each finance source has particular benefits and criteria to follow and use that in your business.
Let’s view the below-given sources of finance and their specific criteria.
1. Commercial Loans
The most trustworthy source of finance for your business is commercial loans. You can get a variety of loans here and follow the particular requirements of each loan.
- Bank Loans
The first type of commercial loan is banks loans. You can get a lump sum amount in the form of a loan against providing your property or any other valuable things to the bank. There is a different time limit for each loan, and it can range from medium to long-term loans.
- Cash Credits
Cash credit is the type that a bank offers in exchange for any tangible items or securities. In this way, as a customer, you can withdraw cash as per yourneed. Plus, it depends on the worth of that tangible object that you provide in exchange for money. In addition, it allows the client to deposit cash in his cash credit account to minimize interest liabilities.
- Credit Unions
Banks follow strict regulations for providing loans to business investors, and you need to have a strong background. It is essential to make the bank sure that you are eligible for the finance you demand. If you do not fulfill the criteria of banks, you have an alternate option to get finance from credit unions.
It offers flexible terms and conditions that you can meet standards quickly. In this way, you can complete the financing needs of your small and medium-size business.
2. Venture Capital
It is another source of capital for business owners. Still, every business owner is not eligible for this source of finance. This capital favors the technology-driven businesses and companies that are doing business on a large scale and have tremendous growth. Potential business can include biotechnology, communications, and information technology. You can acquire ownership or equity capital in your industry on this platform.
Still, you have to pay a healthy return in the form of interest. Keep in mind to opt for investors who have good knowledge and relevant experience in your business. Bitcoin is one the best thing a company could venture, get to know more about this by reading Bitcoin origin, involvement and efficiency.
3. Trade Credit
These are the self-generation source that is based on short-term finance. If you want to obtain finance for your business from this source, you need to have a good reputation in the market. However, it offers a flexible and convenient finance method and offers flexible terms and conditions. You can fulfill the short-term requirements of your business through this reliable source.
4. Installment Credit
The most convenient way is to purchase any asset immediately and pay in installments. It is the most common form that business owners use. Nevertheless, you need to pay the interest amount on each payment or adjust it in a lump sum and pay in the mid or end of the section.
5. Friends and Family
The above all sources are a professional source of finance. When it comes to informal sources of finance, so friends and family are at the top, you can also communicate with your close ones if you run a small business and want small investments.
Excitingly, it does not require any interest to pay, and you can obtain a loan through a clean method. If you need to make an equity structure, in that case, you can contact a lawyer to get professional help because friends and family are not experienced business investors, so they may not help you decide about it.
What are the Sources of Long-Term Financing?
Equity Shares, also known as ordinary shares, represent the ownership capital in a company. The holders of these shares are the legal owners of the company. They have unrestricted claim on income and assets of the company and possess all the voting power in the company.
In fact, the foremost objective of a company is to maximise the value of its equity shares. Being the owners of the company, they bear the risk of ownership also. They are entitled to dividends after paying the preference dividends. The rate of dividend on these shares is not fixed and depends upon the availability of divisible profits and the intention of the directors.
They may be paid a higher rate of dividend in times of prosperity and also run the risk of no dividends in the period of adversity. Similarly, when the company is wound up, they can exercise their claim on those assets which are left after the payment of all other claims including that of preference shareholders.
2. Preference Shares:
Preference share capital is another source of long-term financing for a company. As the name suggests, these shares carry preferential rights over equity shares both regarding the payment of dividend and the return of capital.
These shares carry a fixed rate of dividend and such dividend must be paid in full before the payment of any dividend on equity shares. Similarly, at the time of liquidation, the whole of preference capital must be paid before any payment is made to equity shareholders.
3. Ploughing Back of Profits:
A new company can raise finance only from external sources such as shares, debentures, loans etc. But, an existing company can also generate finance through its internal sources, i.e., retained earnings or ploughing back of profits.
When a company does not distribute whole of its profits as dividend but reinvests a part of it in the business, it is known as ploughing back of profits or retention of earnings. This method of financing is also known as self-financing or internal financing.
Ploughing back of profits is made by transferring a part of after tax profits to various reserves such as General Reserve, Reserve Fund, Replacement Fund, Dividend Equalisation Fund etc. Such retained earnings may be utilized to fulfil the long-term, medium-term and short-term financial requirements of the firm.
Debentures are one of the frequently used methods by which a company raises long-term funds. Funds acquired by issue of debentures represent loans taken by the company and are also known as ‘debt capital’. A debenture is a certificate issued by a company under its seal acknowledging a debt due by it to its holders.
In USA there is a distinction between debentures and bonds. There, the term bond refers to an instrument which is secured on the assets of the company whereas the debentures refer to unsecured instruments.
But, in India no such distinction is made between bonds and debentures and the two terms are used as synonymous. According to Section 2 (30) of the Companies Act, 2013, “the term debenture includes debenture stock, bonds and any other securities of a company whether constituting a charge on the assets of the company or not.”
5. Loans from Financial Institutions:
Financial Institutions are another important source of long-term finance. In India, a number of special financial institutions have been established by the Government at the national level and state level to provide medium-term and long-term loans to the industrial undertakings.
Financial institutions established at the national level include Industrial Development Bank of India (IDBI), Industrial Finance Corporation of India (IFCI), Industrial Credit and Investment Corporation of India (ICICI), Industrial Reconstruction Corporation of India (IRCI), Unit Trust of India (UTI), Life Insurance Corporation of India (LIC), General Insurance Corporation (GIC) etc.
Financial institutions established at the state level include State Financial Corporations (SFCs) and State Industrial Development Corporations (SIDCs). For example, In Haryana, Haryana State Financial Corporation (HFC) and Haryana State Industrial Development Corporation (HSIDC) have been established.
6. Lease Financing:
Lease is a contract between the owner of an asset and the user of such asset. Owner of the asset is called ‘Lessor’ and the user is called ‘Lessee’. Under the lease contract, the owner of the asset surrenders the right to use the asset to another party for an agreed period of time for an agreed consideration called the lease rental.
The lessee pays a fixed rental to the lessor at the beginning or at the end of a month, quarter, half year, or year. At the end of the period of lease contract, the asset reverts back to the lessor, who is the legal owner of the asset.
As the legal owner, it is the lessor (and not the lessee), who will be entitled to claim depreciation on the leased asset. At the end of lease period, the lessee is usually given an option to buy or further renew the lease contract for a definite period.
Leasing is, thus, a device of long term source of finance. Lessee gets the right to use the asset without buying them. His position is akin to that of a person who uses the asset with borrowed money. The real position of lessor is not renting of asset but lending of finance and hence lease financing is, in effect, a contract of lending money. The lessee is free to choose the asset according to his requirements and the lessor is actually the financier.
What are the 4 Common Sources of Financing?
The common financing sources used in developing economies can be classified into four categories: Family and Friends, Equity Providers, Debt Providers and Institutional Investors.
Family and Friends: This source of financing is a popular primary source for many people and small businesses, especially in developing economies. The close familial/friendship relationships between lender and borrower tends to support a level of trust and risk tolerance that most start-ups are unable to secure from outside lenders.
This financing is often ‘informal’ (i.e., without a formal contractual agreement) and the transaction sizes tend to be small. The terms and conditions tend to be flexible but relatively patient, reflecting the fact that this sort of financing usually supports start-up or rapidly growing businesses.
Debt Providers: These include commercial banks, microfinance institutions (MFIs), credit unions, and leasing companies, which bundle short-term funds and then extend them as loans or leases. Financial transactions here tend to be larger (with the exception of MFIs), and low-to-medium risk. Debt is an essential financial instrument because of the lower cost relative to equity. It has greater flexibility and does not require the borrower to cede control.
Equity Providers: These include “public collective investment vehicles” such as mutual (stock) funds and exchange traded funds, and private funds such a private equity funds. Such funds tend to be primarily ‘equity’ focused (taking ownership in business rather than a lending to businesses).
Equity providers are often aligned with commercial investors (or investment banks), which are primarily in the business of structuring and selling (often termed “placing”) equity investments to investors and providing financing advisory services to businesses.
While investment funds are not prevalent in USAID presence and other developing countries, equity can benefit start-up and rapidly growing businesses by providing longer-term patient capital, and in some cases advisory services, while having a higher tolerance for risk.
Institutional Investors: These include pension funds and insurance companies with large amounts of cash inflows that typically need to be invested over the long-term. Institutional investors are important because of their size and huge appetite for debt and equity. While institutional capital in developing countries remains relatively small, it is growing rapidly and is generating interest as to how it can be unlocked to support development.
What are the 3 Major Types of Long Term Funds?
1. Equity Shares:
It is the most important sources of finance for fixed capital and it represents the ownership capital of a firm. The salient features of this issue are that the equity shareholders are to bear all losses or run risks that may arise as owner of the company.
They are entitled to the residue (surplus) that is left after the fixed rate of preference dividend and debenture interest is paid of course, the dividend so received depends on recommendation made by the directors Since they are the owners of the company they enjoy the rights and exercise control.
As raising of funds by the issue of shares has certain distinct advantages over other sources, especially the borrowed capital, once procured, is non-refundable except in case of liquidation, does not create any charge or any encumbrance on the assets of the company, and does not impose any fixed charge on its use.
It is advantageous for a firm to finance its fixed working capital requirements out of the proceeds of the issue of shares which in common parlance goes by the name of ownership capital.
Rights issue, however, represent the issue of equity shares among the existing shareholders in the form of a fixed proportion, e.g., “one for four”, etc. The price is less than the market price and the rights may be sold if required. The rights are issued since the expenses of making an offer are avoided and, secondly, it ensures the sale of the shares.
2. Preference Shares:
These are called Preference Shares since the preference shareholders are entitled to receive a fixed rate of dividend before the dividend is received by the equity shareholders as also to priority of repayment of capital before the equity shareholders in the event of liquidation.
Firms may resort to this technique as long-term capital owing to the above advantages. Since they have no voting rights, they do not have to take any risk and, hence, ownership is not affected.
The different types of preference Shares are discussed below:
- a. Redeemable:
These shares are redeemed at the end of the stipulated period. In India, according to Section 80 of the Companies Act, 1956, these shares are redeemed either out of fresh issue of equity shares or by creating Capital Redemption Reserve Fund out of Profit and Loss Account and/or General Reserve, a sum equal to the face value of the shares.
But premium on redemption of preference shares, if any, is to be adjusted against Share Premium Account and/or Profit and Loss Account.
- b. Irredeemable:
These shares are non-refundable to the holders during the lifetime of the firm.
- c. Cumulative:
If, in any year, the dividend on Preference Shares is not paid due to insufficient profit or loss, the arrear dividends, together with the current one, will be paid at a time out of sufficient profits in subsequent years, i.e., arrear dividends will accumulate.
- d. Non-Cumulative:
Dividend, if it is not paid due to insufficient profit in any year, cannot be claimed by the shareholders, i.e., arrear dividends will not accumulate. But they are to be treated at par with other preference shareholders regarding repayment of capital.
- e. Convertible:
Convertible Preference Shares are those which can be converted into equity shares within a stipulated period of time.
- f. Non-Convertible:
Preference Shares which are not converted into equity shares are called Non-Convertible Preference Shares.
- g. Participating:
In spite of having a fixed rate of dividend, these shareholders share in the surplus of the company which may influence an investor to invest in this type of Preference Shares.
- h. Non-Participating:
It is nothing but the Ordinary Preference Shares which carry only the fixed rate of dividend.
In India, u/s 2(12) of the Companies Act, 1956, Debentures include Debenture Stocks, Bonds and other securities of a company whether or not constituting a charge on the assets of the company.
In other words, a Debenture may be defined as an instrument executed by a company under its common seal acknowledging indebtedness to some person to persons or secure the sum advanced Debentures are called Creditor-ship Securities as these constitute borrowed and/or loan capital of the company.
A Debenture may be issued at par, at a discount or at a premium, i.e., these are issued in the same manner as shares. The Debentures is one of the important sources of raising finance for a company. In order to meet the initial needs, a company can issue Debentures to secure long-term finance.
The different types of Debentures are discussed below:
- a. Redeemable:
Redeemable Debentures are those which are redeemed either at par or at a discount or at a premium after the expiry of the stipulated period. The same can be re-issued even after redemption if not cancelled.
- b. Irredeemable:
These Debentures are not redeemed until and unless the company goes into liquidation.
- c. Convertible:
Sometimes Debentures can be converted into Preference shares or Equity shares at a fixed rate of exchange after a certain period. Such Debentures are called Convertible Debentures.
- d. Bearer:
These Debentures are just like negotiable instruments and are transferable by simple delivery, i.e., transfer of Debentures is not to be registered with the company. Interest is paid at the end of the stipulated period to the person who will possess them, i.e., interest is paid to the holders irrespective of identity.
- e. Registered:
Here, the transfer of Debentures will be effected on execution of a transfer deed or interest is payable or the repayment of Debentures is made to that person whose name is registered in the books of the company.
- f. Mortgage:
When Debentures are secured by a charge on the assets of the company, these are known as Mortgage Debentures.
- g. Naked:
When Debentures are issued without any security (i.e., Unsecured Debentures) in respect of interest or the repayment of the principal, they are called Naked Debentures. Solvency of the company is the only security.
What are the 10 Sources of Finance?
Raising capital for your business can be a challenge and a barrier to the eventual commencement and implementations of your business. While sourcing for fund, you need to, first of all, identify how much you need to start or grow your business.
Below are many varied paths you can source funds to finance your business.
1. Personal savings/ Owner’s fund/ Owner’s equity
This is the most preferred source of fund for most businesses. It includes inheritance or personal savings generated or saved from your previous endeavours. The volume of money available for use depends on your income, your ability to save and to consume and the level of taxation. This source of fund constitutes no liability to your company and it is usually interest-free.
2. Family and friends
This is the next most common sources of funding after personal savings. This is the money you receive from wealthy family members or friends. The good thing about this source of fund is that your family and friends can assist you without being worried about quick returns.
3. Bank credit
Banks provide the major source of fund to businesses with overdraft and term loan being the most popular bank credit open to both new and existing enterprise. The problem with this source of fund is that banks usually require collateral and the interest rate is usually high. Every entrepreneur at some point in his business career will seek a bank loan. It is usually advisable to buy company assets with bank loans instead of using it as the operational cost of your company.
Partnership in its simplest definition is a legal form of business in which two or more individuals share the management, profits and liabilities of a business venture. With a view to expanding the capital base of a new venture, you may decide to take on a partner or partners.
Partnership is governed by “Deed of Partnership’ which spells out how profit and loss should be shared, and each partner’s involvement in the enterprise. Partnerships come in two varieties: general partnerships in which the partners are personally responsible for the liabilities of the enterprise and limited partnerships in which personal assets of partners are protected from any financial claims of the firm’s creditors.
5. Money Lenders
These are individuals or group of individuals (distinct from banks and financial institutions) who offers small personal loans at high rates of interest. Make sure you fully understand the terms and conditions of the contract before you borrow money from them.
Some money lenders give conditions that look sweet but dicey. Some contracts are also constructed in such a way that you end up losing your company if you fail to meet up with the terms and conditions.
6. Angel investors
Angel investors also called Equity investors are individuals with lots of money who provide capitals for business start-ups. They are interested in businesses with promising growth potential. You are required to share ownership and control of your company with the angel investors.
The extent to which they will demand ownership and control of the company depends on the amount of money they invested in your company. You need to be careful not to be pushed aside in your own company. This usually happens when the angel investor has sufficient money for your type of business and invested more than you did.
You may still allow the angel investor to have a larger share of ownership if you desire to exit the business in the short term. Since the idea and passion is in you, some smart investors may still want you to run the business despite the fact that they have majority share.
They may appoint amongst themselves a chairman who is either the highest shareholder or someone with a better experience in the field of the business they invested in to help you run the business.
7. Venture Capitalist
Venture capitalists are group of wealthy individuals, government assisted sources or major financial institutions who have a dedicated pool of capital and makes it available for the expansion of businesses with great profit potential. They hardly invest in new businesses unless there is a significant profit potential which can be identified and measured.
Sourcing fund from a venture capitalist is a good idea because you get money that does not have to be repaid. Banks may be more willing to extend credit to your business because the money invested by the venture capitalist is equity. It is good to note that the venture capitalist may demand control over your business.
This source of fund is only feasible if you have consistently built an excellent reputation in your field of business. Your customers can help finance or partially finance your business by making advance payment for goods. You can equally encourage cash payment instead of giving the customer goods on credit. You can also generate funds by granting cash discount to customers who make early payments.
9. Trade credit/ vendor credit
By negotiating a deal with your suppliers, payment for raw materials or goods supplied may be deferred to a future date. This enables you to use the income generated from the sales of the goods manufactured to pay up your debt instead of borrowing to do so.
The success and availability of trade credits depend on the track record of your enterprise and the willingness of the supplier to part with his goods for several weeks before you finally pay up. You should know that suppliers who agree to supply goods on credit might not do so at the lowest price in town.
Grants are non-repayable funds bestowed by a government or a private non-profit organization/foundation (grantmakers) to an eligible recipient (grantee). Competition for grants is usually heavy but you can obtain grants if your enterprise will have a positive social impact, benefiting not just you but also the entire community.
Grants may not necessarily come in the form of money but may come in the form of fixed asset. For instance, the land where the business/factory will be located or equipment.
What are the Five Characteristics of Long Term Debt Financing?
Long-term debt has a number of characteristics that make it distinct from short-term debt financing. Some of these traits are advantageous for you as a borrower, while others pose potential challenges. Taking on too much long-term debt is risky, but it does offer advantages over paying cash for major purchases.
Mortgages, equity loans, car loans, boat loans, major appliance financing, student loans and personal loans are among common long-term consumer loans.
Characteristics of long-term debt include a higher principal balance, lower interest rates, collateral requirement and more significant impact on your monthly cash flow.
Higher Principal Balance
Long-term debt typically has a higher principal balance than other debt obligations. This is because people don’t usually get long-term loans for smaller purchases.
Mortgages are usually the most expensive purchase people make. Loans of $100,000 or more are common. Car loans of $5,000 to $10,000 are routine as well. The idea of taking on this amount of debt can be scary, but it is often the only way to make such large purchases.
Lower Interest Rates
Long-term debt usually comes with lower interest rates than short-term financing. This is because mortgages, car loans and boat loans are generally secured with the property as collateral to reduce the lender’s risk.
While an unsecured personal loan or credit card may have rates ranging from 13 to 23 percent, depending on your credit, home loans in the 4 to 5 percent range are common as of February 2019. Car loans in the 4 to 6 percent range are also the norm for borrowers with decent credit.
Requirement of Collateral
Whereas personal loans, credit cards and store cards are usually available without collateral, you typically can’t make a major purchase without securing the debt with collateral. This is because of the more significant risks to the lender of losses if you bail on a $100,000 to $200,000 home loan, as opposed to a $5,000 to $10,000 personal loan or credit card balance. By putting up your home, car or boat to get the long-term debt, you do have risks of loss to repossession if you don’t keep up with the payments.
Impact on Monthly Cash Flow
Taking on long-term debt has a more lasting impact on your monthly cash flow. Committing $500 to $1,500 per month to a mortgage, $200 to $400 to a car loan and $300 to $600 on a student loan eats away at your monthly income pretty quickly. These debt commitments are on top of other living expenses like utilities, groceries, entertainment and household items.
High monthly debt commitments reduce how much money you can spend on vacations and entertainment, and they increase your potential for debt problems. While credit cards also affect monthly cash flow, it is generally a short-term commitment. Mortgages and car loans are more commonly considered in basic family budgeting.
Pros and Cons of Long-Term Bank Loans
Long-term bank loans are one way of financing major purchases or consolidating several short-term loans into one longer-term loan. Common examples of long-term loans used by consumers are mortgages, student loans, car loans, boat loans, equity loans and some personal loans. Home, car and auto loans are secured loans, meaning you offer the property as collateral to get the financing.
Long-term loans allow you to buy things — paying for them over time — that you otherwise couldn’t afford. Since most people don’t have $200,000 to shell out for a house, they get financing to purchase it. The loan and interest usually are repaid over 15 to 30 years.
Similarly, a car loan is repaid in incremental amounts across 36 to 72 months. These debt types allow you to work with the lender to figure out how much you can afford to pay back each month over the loan term.
Long-term bank loan products normally have lower interest rates than short-term loans, credit accounts and credit cards. Whereas a standard credit card can range from 10 to 25 percent interest, depending on your credit, you often can get a home loan in the 4 to 5 percent range as of January, 2019.
Home equity loans offer similar rates. Car loans are a bit higher usually, but not by much. This advantage is why some people consolidate high-interest credit card debt using a home equity loan.
The longer your repayment term, the more you end up paying in total interest costs. To demonstrate the total costs of a mortgage loan, HSH Associates shows that a $100,000, 30-year loan at 5 percent has a total repayment cost of $193,255 if you make no extra payments. You pay nearly twice as much for the product, your home, to be able to afford to purchase it through a long-term loan. You usually do get tax breaks on mortgage interest, but your net interest costs still are significant.
Getting wrapped up in long-term debt obligations also restricts your monthly cash flow. Homes, cars, boats, major appliances and other big-ticket items add up quickly. If your monthly net income is $4,000, your living expenses are $2,500 and your debt repayments are $1,200, you only have $300 remaining that is not spoken for. This makes it difficult to build a rainy-day fund, put away money for college or have spending cash.
What are the Uses of Long Term Financing?
It can be very advantageous to take out a long term loan for both a consumer and for a business. After the maturity date and when full ownership is assumed, the former debtor (and now owner) can use the asset and the positive credit they have developed paying for it for future borrowing. Thus, reliable debtors experience a compounding effect of the advantages of a long term loan.
Long term loans can be from three to twenty-five years in duration and in order to qualify a debtor must have a positive credit history, the ability to provide collateral, and capital. Provided that those criteria are met, a long term loan can minimize the effect on operational cash flow, a debtor can borrow at a lower interest rate, a business can minimize investor interference, and it is also an effective way to build credit worthiness.
What are the Features of Long Term Financing?
Long-term loans are planned borrowings and repayment is scheduled over a long period of time. Some of the main features of long-term loans have been mentioned below:
High loan amount :
Long-term loans offer higher principal amount to be borrowed as against a quick loan or a short-term loan. Depending on one’s financial capabilities, the bank will be able to offer higher loan amounts.
Long-term loans are offered only if a collateral has been shared. This makes the loan secure and reduces the risk of defaulting by the applicant. In case, the borrower is not able to repay the loan, the bank can take over the asset that has been kept as collateral to close the loan.
One can repay the long-term loan by making Equated Monthly Instalments (EMIs) over an agreed period of time with the bank. The instalments are made up of two elements – principal amount and the interest. The EMIs can be paid through post-dated cheques or by giving the bank standing instructions to deduct the amount from the savings account on a monthly basis.
Attractive rate of interest :
Due to the quantum of the loan and the longer tenure involved, the rate of interest tends to be lower than other types of loans. Stiff competition in the market also ensures lower interest rates being offered by the bank.
Tax Benefit :
Some of the long-term loans have the benefit of tax exemption. Home loan is one such loan product which offers this benefit. A car loan does not have this benefit of tax exemption.
What are Long Term Financial Assets?
Long-term assets are assets, whether tangible or non-tangible, that will benefit the company for more that one year. Also known as non-current assets, long-term assets can include fixed assets such as a company’s property, plant, and equipment, but can also include other assets such as long term investments, patents, copyright, franchises, goodwill, trademarks, and trade names, as well as software.
Long-term assets are reported on the balance sheet and are usually recorded at the price at which they were purchased, and so do not always reflect the current value of the asset. Long-term assets can be contrasted with current assets, which can be conveniently sold, consumed, used, or exhausted through standard business operations with one year.
Read Also: Calculating the Time Value of Money
Long-term assets are those held on a company’s balance sheet for many years. Long-term assets can include tangible assets, which are physical and also intangible assets that cannot be touched such as a company’s trademark or patent.
There is no standardized accounting formula that identifies an asset as being a long-term asset, but it is commonly assumed that such an asset must have a useful life of more than one year.
Some examples of long-term assets include:
- Fixed assets like property, plant, and equipment, which can include land, machinery, buildings, fixtures, and vehicles
- Long-term investments such as stocks and bonds or real estate, or investments made in other companies.
- Trademarks, client lists, patents
- The goodwill acquired in a merger or acquisition, which is considered an intangible long-term asset
Changes observed in long-term assets on a companies balance sheet can be a sign of capital investment or liquidation. If a company is investing in its long-term growth, it will use revenues to make more asset purchases designed to drive earnings in the long-run.
However, investors must be aware that some companies will sell their long-term assets in order to raise cash to meet short-term operational costs, or pay the debt, which can be a warning sign that a company is in financial difficulty.
What is Long Term Investment?
A long-term investment is an account on the asset side of a company’s balance sheet that represents the company’s investments, including stocks, bonds, real estate, and cash. Long-term investments are assets that a company intends to hold for more than a year.
The long-term investment account differs largely from the short-term investment account in that short-term investments will most likely be sold, whereas the long-term investments will not be sold for years and, in some cases, may never be sold.
Being a long-term investor means that you are willing to accept a certain amount of risk in pursuit of potentially higher rewards and that you can afford to be patient for a longer period of time. It also suggests that you have enough capital available to afford to tie up a set amount for a long period of time.
A common form of long-term investing occurs when company A invests largely in company B and gains significant influence over company B without having a majority of the voting shares. In this case, the purchase price would be shown as a long-term investment.
When a holding company or other firm purchases bonds or shares of common stock as investments, the decision about whether to classify it as short-term or long-term has some fairly important implications for the way those assets are valued on the balance sheet. Short-term investments are marked to market, and any declines in value are recognized as a loss.
However, increases in value are not recognized until the item is sold. Therefore, the balance sheet classification of investment—whether it is long-term or short-term—has a direct impact on the net income that is reported on the income statement.