Evaluation of Long-Term Finance Alternatives - Article Example

A firm can opt in for any kind of long-term financing like issue of securities, term loans, internal accruals, suppliers' credit scheme and equipment financing. There are also some additional options of funding like deferred credit, unsecured loans and deposits and venture capital financing. Types of Capital: Three types of capital can be issued by firms namely equity capital, preference capital and Debenture capital. All three of them vary in terms of risk, return and the pattern of ownership.

Equity Capital - Equity share holders are the actual owners of the business. They enjoy all the profits of the company that are residual in nature and this is after paying the preference shareholders and all the other creditors, if any. The liability restriction of equity share holders is limited to the amount of share capital contributed by them. The cost of equity capital is higher than all other forms of capital. It is to be noted that equity dividends are not tax-deductible expenses and also the costs of issue is very high.

Long term financing is essential for any operating firm. Long term finance are necessary for investments such as modernization or expansion of existing firms and also for working capital management. The funding process should be a trade-off between the cost of funding, the risk factor involved and the expected returns. This is in order to maintain a reasonable spread is maintained for the firm.References:1. Financial Management for Managers, published by ICFAI center for Management Research, Ref no: FMM - 04200405.

Preference Capital - Though similar to equity capital, preference capital has no obligatory payment to the preference shareholders. Even the preference dividend is not tax deductible. An advantage that the preference shareholders have is that they earn a fixed rate of return for their dividend payment. Debenture Capital - Debenture is nothing but a marketable legal contract whereby the company promises to pay its owner, a specified rate of interest for a defined period of time and to repay the principal at the specific date of maturity.

These are usually secured b y a charge on the immovable properties of the company.A firm can also raise capital from the primary market by way of issuing securities. Different ways of issuing securities exist.Public Issue: Companies issue securities to the general public in the primary market and thereby get them listed in the stock exchange. These securities are then traded in the secondary market.Rights Issue: When a firm issues additional equity capital. It has to first offer such securities to the existing shareholders on a pro rata basis.

Such a method of issuing securities is called as Rights Issue.Private Placement: This method of financing involves direct selling of securities to a limited number of institutional or high net worth investors. The delay in going public and also the expenses involved can be avoided in this case. The major advantages here are the easy access to any company, fewer formalities and lower issue cost.