21. Sources Of Long Term Finance From Financial Management Subject

Summary

The video provides an in-depth overview of long-term finance, essential for students in finance-related courses. It covers different sources of finance: long-term, medium-term, and short-term, focusing primarily on long-term finance. Key sources discussed include the issuance of shares (equity and preference shares), retained earnings, debentures, and long-term loans. The instructor explains the characteristics, risks, and benefits of each source, emphasizing the importance of understanding these concepts for practical application in business. The session aims to equip students with knowledge of how companies accumulate and utilize funds for sustainable growth.

Takeaways

• 📊 The topic of the class is long-term finance and how companies accumulate and utilize funds for growth.
• 🏢 Different companies require various types of financing based on their size and needs: small, medium, or large organizations may need working capital or long-term finance.
• 💰 Sources of finance are divided into three types: long-term, medium-term (1-5 years), and short-term (below 1 year).
• 📈 Long-term sources of finance are needed for periods longer than 5 years and are typically used for large investments like fixed assets.
• 📑 The main long-term financing sources include equity shares, preference shares, retained earnings, debentures, and long-term loans.
• 📉 Equity shareholders bear both profits and losses of the company, while preference shareholders only share in profits and get priority in receiving dividends.
• 🔒 Preference shareholders are prioritized over equity shareholders for dividends but do not bear company losses.
• 📉 Debentures are another key source of long-term finance, functioning similarly to loans, where the holder receives interest regardless of the company's financial status.
• 💼 Retained earnings are the profits set aside by a company for future use, acting as a financial reserve for uncertainties.
• 🏛️ Long-term loans are taken from financial institutions or banks, mainly for purchasing fixed assets or large organizational investments.

Q & A

What are the three main types of finance sources?

The three main types of finance sources are long-term sources, medium-term sources, and short-term sources.

What defines long-term sources of finance?

Long-term sources of finance are those that extend for more than five years and are typically used to finance fixed assets or long-term investments.

What are some examples of medium-term sources of finance?

Medium-term sources of finance include public deposits, loans from commercial banks, and leasing finance, which are typically used for a period of one to five years.

How are short-term sources of finance defined?

Short-term sources of finance are for periods of less than one year and include options like bank credit, trade credit, installment credit, advances, and commercial papers.

What are the two main types of shares a company can issue?

A company can issue two main types of shares: equity shares and preference shares.

What are the key characteristics of equity shares?

Equity shares represent ownership in a company. Shareholders are eligible to share in the profits and losses of the company, and their dividends fluctuate based on company performance.

What are preference shares, and how do they differ from equity shares?

Preference shares provide shareholders with a fixed dividend and priority over equity shareholders when profits are distributed. However, preference shareholders do not share in company losses.

What are retained earnings, and how are they used?

Retained earnings refer to profits kept by the company for future uncertainties or investments. These funds provide financial stability and are used to support long-term financial needs.

How do debentures function as a source of long-term finance?

Debentures are a type of long-term loan where the company borrows funds from investors. Debenture holders receive a fixed interest, and they have a priority claim on company assets in case of liquidation.

What is the purpose of long-term loans in corporate finance?

Long-term loans are taken by companies to finance the purchase of fixed assets such as machinery, buildings, and equipment, or for renovation and expansion projects.

Outlines

00:00

📘 Introduction to Long-Term Finance and Its Importance

In this paragraph, the speaker introduces the topic of long-term finance, emphasizing its importance for finance students across various academic disciplines such as B.Com, BBA, MBA, and professional courses like CA, CS, and CMA. The speaker explains how understanding long-term finance and its sources is crucial for companies to accumulate and utilize funds effectively. The difference between working capital and long-term finance is briefly touched upon, highlighting how different organizations require different financial strategies based on their size and needs.

05:01

📊 Three Types of Finance Sources: Long-Term, Medium-Term, and Short-Term

This section classifies financial sources into three categories: long-term, medium-term, and short-term. Long-term sources refer to funds that last over five years, medium-term covers 1-5 years, and short-term is below one year. The paragraph explains various sources for each type, such as public deposits and loans for medium-term and bank credit for short-term. However, the speaker clarifies that the focus of the class is on long-term finance and proceeds to set the stage for further discussion on the topic.

10:02

💡 Introduction to Sources of Long-Term Finance

The speaker introduces the core topic of long-term finance sources, explaining that this form of finance spans over five years and is crucial for organizations looking to invest in fixed assets and expand. Shares, a significant source of long-term finance, are discussed briefly, with the two primary types of shares—equity shares and preference shares—introduced. The speaker touches on the differences between these two types and how they relate to a company's profits, losses, and ownership structure.

15:03

📈 Detailed Explanation of Equity Shares

This paragraph dives deeper into equity shares, defining them as ordinary shares that represent ownership in a company. Equity shareholders share both profits and losses, with dividends fluctuating based on the company’s performance. The speaker uses an example of a shareholder holding 10,000 shares to illustrate the risks involved, noting that shareholders can lose their investment if the company faces significant losses. The concept of limited liability is also discussed, explaining that shareholders are only responsible for their investment and not their personal assets.

⭐ Preference Shares and Their Benefits

The speaker elaborates on preference shares, explaining that they have priority over equity shares when it comes to receiving dividends. Preference shareholders are guaranteed dividends, even if a company faces losses, and their unpaid dividends from previous years are carried forward. However, unlike equity shareholders, they do not share in the company’s losses. Preference shareholders are treated similarly to creditors, receiving dividends before equity shareholders and having a higher claim in the event of liquidation.

💰 Retained Earnings as a Long-Term Finance Source

Retained earnings are introduced as another source of long-term finance, where a portion of a company’s profits is reserved rather than distributed to shareholders. This retained amount can be used during economic downturns or for future investments, helping the company stay financially secure. The speaker provides an example where a company retains 50 lakh from a 2 crore profit to ensure its long-term stability.

💳 Understanding Debentures and Their Role

Debentures are presented as a critical long-term finance option, functioning like loans that a company must repay with interest, regardless of profit or loss. Debenture holders receive fixed interest payments annually, offering them security and priority in case the company goes under. The speaker explains the difference between interest on debentures and dividends on shares, noting that debenture holders are paid before shareholders in times of financial difficulty.

🏦 Long-Term Loans and Their Purpose

This paragraph discusses long-term loans, which companies take from financial institutions or banks to purchase fixed assets like buildings, machinery, or equipment. These loans help organizations make significant investments in their infrastructure. The speaker highlights that long-term loans are typically aimed at financing large-scale, essential business activities and are a vital source of long-term finance.

🔍 Recap and Importance of Long-Term Finance

The speaker concludes by summarizing the four main sources of long-term finance: equity shares, preference shares, retained earnings, and debentures, with a special focus on shares and debentures. They mention that these topics will be explored in greater detail in upcoming classes to help students better understand how organizations accumulate long-term funds. The importance of mastering these concepts for academic and practical purposes is emphasized, and students are encouraged to stay connected for future lessons.

Keywords

💡Long-term Finance

Long-term finance refers to funding that is needed for a period exceeding five years. It is crucial for purchasing fixed assets, expanding business operations, or undertaking large projects. The video discusses various sources of long-term finance, such as issuing shares, debentures, and long-term loans, which are essential for sustaining and growing an organization.

💡Sources of Finance

Sources of finance are the different means through which a company can raise funds. They are categorized into long-term, medium-term, and short-term sources. The video emphasizes understanding these categories to determine the appropriate funding needed based on the organization’s goals and duration of financial needs.

💡Equity Shares

Equity shares represent ownership in a company and entitle shareholders to share in its profits and losses. The video describes equity shareholders as true owners because they bear both gains and losses. For example, if a company incurs losses, equity shareholders might not receive dividends and could lose their invested capital.

💡Preference Shares

Preference shares are a type of share that gives shareholders preferential treatment regarding dividend payments before equity shareholders. These shareholders receive dividends at a fixed rate and have priority over equity shareholders in profit distribution. However, they do not share in the company’s losses, unlike equity shareholders.

💡Retained Earnings

Retained earnings refer to the portion of net income that a company keeps rather than distributing to shareholders as dividends. This reserve is used for future investments, handling uncertainties, or company growth. In the video, retained earnings are highlighted as a vital long-term finance source that ensures the company’s financial stability.

💡Debentures

Debentures are a type of long-term debt instrument issued by companies to raise capital. They offer a fixed interest rate and must be repaid even if the company is performing poorly. The video mentions that debenture holders have a higher claim on assets than shareholders in case of liquidation, making them a relatively safer investment.

💡Short-term Sources

Short-term sources of finance are funds required for less than one year, used primarily for daily business operations. Examples include bank credit and trade credit. The video explains that companies often utilize these sources to manage immediate financial needs without taking on significant long-term commitments.

💡Medium-term Sources

Medium-term sources of finance are funds obtained for one to five years, used for needs that are not immediate but do not require long-term funding. These include public deposits and loans from commercial banks. The video notes that these sources are chosen based on specific financial needs of an organization, such as funding for equipment or renovation.

💡Dividend

A dividend is a distribution of a portion of a company’s earnings to its shareholders. It is typically given in the form of cash or additional shares. In the video, dividends are discussed concerning equity and preference shareholders, highlighting how dividends fluctuate based on the company's profitability.

💡Liability

Liability refers to the legal responsibility of shareholders or companies to settle debts. For equity shareholders, liability is limited to their investment in the company. The video explains that equity shareholders could lose their entire investment in case of company failure but are not liable beyond that amount.

Highlights

Introduction to the importance of long-term finance for companies, especially for finance students across various courses.

Explanation of the significance of funds in an organization, emphasizing that proper accumulation and utilization of funds are crucial for success.

Overview of the different types of finance sources: long-term, medium-term, and short-term.

Detailed discussion on long-term sources of finance, defined as funds required for more than five years.

Introduction to the three types of finance sources: long-term sources (over 5 years), medium-term sources (1-5 years), and short-term sources (less than 1 year).

In-depth focus on long-term finance sources, leaving medium-term and short-term sources for later discussions.

Description of the importance of issuing shares as a primary method for accumulating long-term funds.

Explanation of equity shares as ordinary shares, highlighting that equity shareholders are true owners who share in both profits and losses of the company.

Introduction to preference shares, which offer prioritized dividends but do not share in the company's losses.

Comparison between equity and preference shares, emphasizing the different risks and benefits associated with each.

Discussion on retained earnings as a crucial source of long-term finance, used for future uncertainties and ensuring the company's stability.

Explanation of debentures as a secure long-term finance option that provides fixed interest returns regardless of the company's performance.

Highlight of long-term loans, typically used for purchasing fixed assets or major organizational investments.

Summary of the four main sources of long-term finance: issuing shares, retained earnings, debentures, and long-term loans.

Indication that future classes will delve deeper into the specifics of shares and debentures, crucial for practical understanding and exams.

Transcripts

all right

hello dear students welcome to day

because Commerce and management Academy

today we'll see long-term Finance how to

accumulate what are the

what are the sources of long-term

finance that we will say very important

topic as a finance students whether

you're doing bcom BBA MBA M com c and

professional courses like cescm cstma

whatever may be the courses this topic

is must

practical to gain the Practical

knowledge so how the companies

accumulate the

funds and what are the sources

and how they can utilize it all these

things you will be learning in this

chapter don't skip but important topic

now let me tell you funds are the main

important source for every organization

if funds are sufficient if funds are

accumulated properly

if funds are in a proper way utilized in

a proper way then automatically the

company can utilize everything mostly

now the sources of funds what are the

sources of funds how we can accumulate

what are the sources that we have to see

and the sources of funds depends on the

organization

sometimes organization may be small

medium and very big multi-million

organization whatever it may be it

depends on the size of the organization

they require the funds

and the sources different sources are

there I told you now so some

organizations need more of working

capital working capital is for

day-to-day transactions I need working

capital a lot and some organizations may

need long-term Finance to purchase fixed

assets to invest on on their

organization activities they may need

long term but whatever it may be every

organization has its own policies so how

much is required where we can collect it

what are the sources

right all these things will be

discussing

in this class okay mainly if you see

sources of long-term Finance we are

discussing

Finance sources are different first of

all uh the sources of Finance I would

say first rather than long term

forget about this sources of Finance

what are the sources of Finance we'll

discuss then after that sources of long

term Finance we can go ahead

sources of finances three types

first one is long-term sources

and medium term sources and short-term

sources

now long term sources means it is for

long period

when you take any sources when you

collect any funds that is for long

period generally it would be more than

five years

more than 5 years

then we can say it as a long term

sources

we'll discuss in depth later second one

is that medium term sources medium term

sources means these are the medium term

Source medium terms what is the period

period is here 0 to sorry 1 to 5 years

more than one year to one to five years

investment is

one to five is more than one year and

Below five years that we say it as a

medium term sources what are the median

term sources public deposits law and

Loans from commercial Banks and also

leasing Finance these three are we can

say it as a median term sources that is

one to five years third category comes

to short-term sources

short term short term means just below

one year

when you take loan when you take any

funds below one year that is called as

short-term sources this is below one

year

[Music]

what are the short-term sources Bank

credit Trade Credit through the bank we

can take credit and through

organizations also we can take credit

Trade Credit Credit bank credit Trade

Credit installment credit

advances and Commercial papers these are

all the general sources from the banks

itself so those are short-term sources

right now in this class we are not going

to discuss about medium term sources and

short-term sources so this every

organization is having enough knowledge

and when time comes when requirement is

there according to that they are in a

position to accumulate they are in a

position to take the sources of

short-term or medium terms so that is

why we are not going to discuss these

two Now sources of long term Finance we

are going to discuss

this is the major topic of today's class

okay sources of long-term Finance

long-term Financial long-term more than

five years I wanted to get some sources

some Finance I wanted to accumulate then

that is long-term sources in long-term

sources these are the main sources

we'll discuss each and every point right

now and in depth in depth in the coming

classes we'll discuss each and every

point right now I'll give you a briefing

of what are the long term sources first

thing is the tissue of shares chairs are

the main source of accumulating the

funds every organization

share share

so how many shares are there

total two Shares are there

one is issue of shares a company can

issue the shares to accumulate the fund

so first to share is that we can say it

as Equity shares second one is

preparations these two are the main

shares a company can issue what are

these Equity shares

let me give you a briefing so Equity

Shares are we call it as ordinary shares

a company owner's shares company owners

funds also we say why because Equity

shares when we issue

a person who purchases Equity shares he

is eligible to share the profits and

losses of the company

are you getting it so Equity Shield

shareholders they are going to share the

profits and losses of the company laws

also they are going to Bear the company

is in laws the loss also

uh makes difference to the equity

shareholders but up to the limitation of

their shares only

suppose I have purchased around 10 000

Equity shares okay

10 000 Equity shares I have purchased

symphony is under loss

if company is under profit on this

shares I'm going to get every month some

dividend

dividend dividend also fluctuates

dividend fluctuates when companies and

profits lots of profits huge profits are

there then I may get a little bit more

dividend when companies under laws or

may not be much profits dividend will be

less when companies under lock no

dividend at all

companies in total loss then they may

lose even the 10 000 rupees also their

investment if my investment is ten

thousand my investment ten thousand also

I may miss I may not get back this 10

000 also

profits or losses I am going to share

and also if it if the company is under

huge loss 10 000 also I'm not going to

get back

so these are the main two features of

equity shareholders Equity shareholders

means they are the true owners because

they are going to share the profits and

losses if companies under more loss even

their share amount also they may not get

back

so that is why we say them as owners of

the true owners of the company

okay their dividend rate is always block

shares depending on the company's

profits and losses so they are Equity

shareholders but anyway their uh what do

you say their problem problem are there

uh

there is one word I am unable to

recollect it

anyway yeah anyway the liability

capacity is up to this 10 000 only not

more than that

up to ten thousand liability

and beyond that they are not going to

spare their personal assets only up to

ten thousand companies under huge loss

whatever it may be at the most I may not

get first thing is that I may not get

the profits I may not uh get even the 10

000 rupees out so that's all

personal assets no means liability is

limited up to the shares not their

personal these are the main points

remember about the equity shares second

thing is that preferentials

the word is saying preference

preference shares means a preference

will be given to this preference

shareholders where

when company gets the profits when

companies in profits first dividend

preferences given to these people first

give them dividend then after that we'll

see the equity shareholders

are you getting this point

suppose a company is company got one

crore

one crore profit they got profit this is

okay

when company gets a profit of one crore

first of all they'll think about

Distributing this profit in the form of

dividend first the reference

shareholders

preference shareholders first

at what rate already decided something

say 12 or 15 something so according to

that they'll be given they are not going

to Bear the losses

they are not going to share the losses

of the company they are going to share

only the profits only that is why we say

the mother preference shareholders

this is first point remember second

Point related to the preference

shareholders are when company is under

loss

companies under loss this year the

company is unable to pay the dividend to

the shareholders next year they'll take

next year accumulated last year and this

year also

anyway they are going to get the

uh their their dividend they're doing

this year or last year whatever it may

be everything they are going to get that

is why we say them as a preference

shareholders but true owners of the

company who are they Equity shareholders

because they are bearing the losses and

also profits sharing everything

companies under loss even their shares

amount also they may lose it but here it

is not like that at any cost First

preference is given to this preference

shareholders to get the dividend then

whatever is left out of this one crore

that will be distributed to the Equity

shareholders and that will be used for

some other sources some other activities

but preference is given to the

preferential holders

they are just like creditors of any

company

getting it issue of shares Equity shares

preferences very important please

remember this is main source of getting

the long term Finance in long term

Finance whenever you want you'll think

about issuing of shares what should I

issue preferences are

equally shares how many preference

shares I have to issue and how many

Equity shares I have this that depends

on the organization

getting it now Second Source is that

retained earnings

retained earnings is also another

long-term Finance Source what is retain

earning you must know first of all let

me clear this area

what is written learning whenever a

company gets a lots of profits

whenever company gets lots of profits

say a company got two crores of profit

company got two crores of profit out of

two crores

what do they do to crits are they going

to distribute and type 2 crores to the

preference shareholders and Equity

shareholders in the form of dividend no

any wise company they do not do such

kind of activity out of two groups some

amount say for example 50 lakh

50 lakh they wanted to keep it as

retained earnings

retained earnings means this is the

amount taken from the profits every year

they get the profits whenever they get

lots of profits out of their submit some

amount assumed that 50 lakh it can be

anything depending on the organization

position depending on the profits okay

assume that so 50 lakh they kept it as a

retained earnings retained earnings are

for the future uncertainty activities

in future anything happens to the

organization due to recession due to

Market condition

our company is under loss the in such

cases this amount is going to work like

results

this government they can use it

written and if this will protect the

organization

this will gives the confidence to the

organization returned earnings the more

written earnings companies having means

the company is in a very good position

safe position

no doubt at all so that's about the

retain earnings retain earnings also

always long term

I kept it out of two crores 50 lakh as

written earnings 50 lakh is going to

utilize by the organization for long

period long period whenever any

uncertainty is there then they can use

it otherwise that will retain in the

organization itself only

this is also another long-term Source

very important one third one is the

debentures

debentures uh like companies issuing

shares now in the same company can issue

a debentures also

debentures are one of the important

Source long-term source of any

organization so debentures means suppose

a company is issuing uh debentures of

say

10 uh 10 000 or 1 lakh one lakh say

is issuing

debentures are compulsory and it is like

a credit cards to the organization

they have to pay back at any cost

though the companies under loss also if

the company is closing position still

first preference will be given to the

debenture holders let them to get back

their money

debentures supposedly one one lakh I

have a company has issued company issued

one lakh out of this I have purchased

say 1000 debentures

my investment is 1000 purchasing of

debentures when I purchased debentures

of 1000 on this I am going to get

interest

foreign

shares Equity shares of different shares

I get dividend

if I purchase dividend uh debentures

then I get interest interest it always

decided in the beginning itself only

like 12 percent dividend will be given

to the debenture holders 12 percent

means every year I'll be getting 12

percent only not more than that or not

less than this

so that's the interest I'm going to get

every year

whatever may be the position of the

company companies under loss company is

not getting huge profit or companies

getting lots of profit doesn't matter as

per the decision I'll be getting 12

percent interest on this debentures

if company is closing winding up at that

position also first preference will be

given to the debenture holders first pay

off everything

whatever they have invested by the

debenture holder pay off them first

then after that we'll see the

shareholders in shareholders first whom

do you prefer preference shareholders

and next last list

preference is given to the equity

shareholders are you getting this point

very important

okay that's about the debenture holders

The Venture holders are always on the

safe side they'll be getting their

investment is safe they'll be getting

every year interest whatever is decided

okay so this is also one of the best

source to gain the in the long term

finance and last one is that long term

loans

long-term loans means generally they

take loans from any organization from

financial institutions are from any

place

to purchase the fixed efforts

any fixed assets wanted to purchase

this is to purchase any fixed assets

main purpose is this for this purpose

taking Long Term Loan

uh purchasing fixed as I suppose I

wanted to establish your organization

I need a lots of equipments building I

need Furniture I want Machinery I want

Office tables and set up everything I

want for that purpose ready to take the

Long Term Loan it can be taken from

anyone from the financial financial

institutions or from the banks from

anywhere you can take but main purpose

is to purchase the fixed asset or uh for

repair a re-establishment renovation any

such kind of activities we can go for

the long term Finance these are the main

four sources to get the long-term

Finance

each and every Point issue of shares and

Depends these two are the main important

points and related to the retained

earnings and long-term loans there is

nothing much to discuss just to have an

idea is enough but about the issue of

shares

both

preferences and Equity shares these two

are debentures these two points we are

going to discuss in depth in the coming

classes

because you must know what what are the

shares if you have idea then only you

will be in a position to get the shares

in the coming coming years so that is

with these two topics will discuss in

depth in the coming classes hope it is

clear very important

gain the knowledge and of course

examination point of you also very

important how do you accumulate the

sources what are the sources

off funds so this is important

stay connected in the coming classes

we'll discuss about the shares and

debentures in them okay and by the way

don't forget to share this videos stay

connected and study well have a bright

careers good luck