SOURCES OF LONG TERM FINANCE The sources from which a finance manager can raise long-term funds are

broadly classified as 1) External Sources 2) Internal Sources. Internal sources include retained earnings, depreciation (as depreciation only represents reduction in the value of the asset through wear and tear, obsolescence etc, and is not an actual cash outflow). The focus in this article is on the long-term external source of finance. Various sources of long-term finance are Share capital * Equity share capital * Preference share capital. Debenture Capital * Non-Convertible Debentures (NCD) * Fully Convertible Debentures (FCD) * Partly Convertible Debentures (PCD) Term Loans * Rupee term loans * Foreign currency terms loans. There are many other sources of long-term finance like deferred credit, unsecured loans and deposits, suppliers credit scheme, leasing and hire purchase which are beyond the scope of this article. Equity Capital: Equity capital represents the ownership capital. The equity shareholders collectively own the company and enjoy all the rewards and the risks associated with the ownership. However, unlike the sole proprietor or the partner of the firm, the downside risk of the shareholders is limited to their capital contribution. Residual Claim: It refers to the residual income on which the shareholders have a right. Residual income is the income left after the claims of all others lenders of long-term finance in the form of interest and taxes have been met. It is the figure of profit after tax less dividend to be paid to preference shareholders. The equity shareholders have a residual claim on the income of the company. The company has distributed the whole profit as dividend to the equity holders or the company may retain a part of its profit. The dividend decision is the decision of the board of directors. Equity Shareholders cannot contest it in a court of law. Liquidation: Refers to the closure of a company. It may be due to losses and non-viability of the operations. The capital contributed by the equity shareholders cannot be redeemed until the liquidation of the company. From the companys point of view funds through equity capital has both advantages and disadvantages. The main advantages are: * It is a source of permanent capital * Payments of dividend is not a legal obligation * Equity capital provides the base for raising debt as equity represents the commitment of promoters to the growth of the company.

The main disadvantages are: * Non-voting shares refer to the equity shares which do not carry voting rights. Thus, non-voting shareholders do not involve in making management decisions. * Public offer of equity capital can result in a dilution of the effective control exercised by the existing shareholders. However, this can be avoided by issuing of non-voting shares (which no corporate is yet allowed to do). * Unlike interest on debentures, dividends on equity are not tax deductible. Out-flow amounts on dividends will not provide any tax-shield.