Republic of the Philippines

RAMON MAGSAYSAY TECHNOLOGICAL UNIVERSITY

Iba, Zambales
Graduate School Department

Name: MEERA JOY D. BLANCO

Course: Doctor of Education Major in Educational Management
Subject: EDMA 608: School Finance & Business Management
Professor: Dr. ESMEN M. CABAL

ALTERNATIVE SOURCES OF FUND: LONG TERM FINANCING

LONG TERM FINANCE

Long-term financing means capital requirements for a period of more than 5 years to 10, 15, 20 years or maybe more
depending on other factors. Capital expenditures in fixed assets like plant and machinery, land and building etc. of a
business are funded using long-term sources of finance. Part of working capital which permanently stays with the business
is also financed with long-term sources of finance.

SOURCES OF LONG TERM FINANCING:

External Sources Of Finance
External Source of Finance / Capital suggests the very nature of finance/ capital. By external sources, we mean
the capital arranged from outside the business, unlike retained earnings which are internally generated out of the
activity of business. External sources of finance are those sources of finance which come from outside the
business.
External sources of finance are equity capital, preferred stock, debentures, term loans, venture capital, leasing,
hire purchase, trade credit, bank overdraft, factoring etc.

Bonds
In finance, a bond is an instrument of indebtedness of the bond issuer to the holders. The most common types of
bonds include municipal bonds and corporate bonds.
The bond is a debt security, under which the issuer owes the holders a debt and (depending on the terms of the
bond) is obliged to pay them interest (the coupon) or to repay the principal at a later date, termed the maturity
date. Interest is usually payable at fixed intervals (semiannual, annual, sometimes monthly). Very often the
bond is negotiable, that is, the ownership of the instrument can be transferred in the secondary market. This
means that once the transfer agents at the bank medallion stamp the bond, it is highly liquid on the secondary
market.

Stocks
A stock is a type of security reflecting ownership in a publicly traded company.
A share of stock is the smallest unit of ownership in a company. If you own a share of a company’s stock, you
are a part owner of the company.
You have the right to vote on members of the board of directors and other important matters before the
company. If the company distributes profits to shareholders, you will likely receive a proportionate share.
One of the unique features of stock ownership is the notion of limited liability. If the company loses a lawsuit
and must pay a huge judgment, the worse that can happen is your stock becomes worthless. The creditors can’t
come after your personal assets. That’s not necessarily true in private-held companies.
TWO TYPES OF STOCKS
Common Stock
Common stock represents the majority of stock held by the public. It has voting rights, along with the right to share in
dividends.
When you hear or read about “stocks” being up or down, it always refers to common stock.
Preferred Stock
Despite its name, preferred stock has fewer rights than common stock, except in one important area – dividends.
Companies that issue preferred stocks usually pay consistent dividends and preferred stock has first call on dividends over
common stock.
Investors buy preferred stock for its current income from dividends, so look for companies that make big profits to use
preferred stock to return some of those profits via dividends.

STOCKS BONDS
Issuer sells equity to investors Issuer sells debt to investors

Owner obtains ownership stake in Owner is a creditor to the issuer

the issuer (lends money)

Principal is completely at risk Return of principal is promised

Usually entail voting rights No voting rights

Usually generates periodic interest

May generate periodic dividends
payments typically not dependent
if issuer is profitable
on issuer's performance

Voting rights to address non- Limited legal rights for non-

performance payment

Low priority for repayment in High priority for repayment in

case of issuer bankruptcy case of issuer bankruptcy

RETAINED EARNINGS
It refers to the money a company has earned and not used for paying expenses or dividends. In other words, Retained
earnings refer to the percentage of net earnings not paid out as dividends, but retained by the company to be reinvested in
its core business, or to pay debt. It is recorded under shareholders’ equity on the balance sheet.
Net income or loss is ascertained with the help of preparation of Income Statement also called as Trading, Profit & Loss
Account. Retained earnings increase when a business receives income, whether through profits gained by providing
customers a service or a product. Retained earnings are carried over from the previous year if they are not exhausted and
continue to be added to retained earnings statements in the future. An increase or decrease in accumulated retained
earnings during an accounting period is the direct result of the amounts of net income or loss and dividend payouts for that
period.
  Dividends also affect Retained Earnings. Dividends are paid to the shareholders as a return on their investment. This
cash is paid out by the company to its stockholders on a date declared by the business’s board of directors, but only if the
company has sufficient retained earnings to make the dividend payments. The Retained earnings and equity are both
decreased as a result of paying dividends.
During an accounting period the Retained Earning may either increase or decrease due to the  fluctuations in a business’s
cash flow which is mainly because of net gains or net losses or paying out dividends. All these events will be recorded in
the Accounting records.
A large retained earnings balance always implies a financially healthy organization.

LONG TERM DEBT

 Long-term debt consists of loans and financial obligations lasting over one year. Long-term debt for a company would
include any financing or leasing obligations that are to come due in a greater than 12-month period. Long-term debt also
applies to governments: nations can also have long-term debt.
A company takes on long-term debt in order to acquire immediate capital. For example, startup ventures require
substantial funds to get off the ground and pay for basic expenses, such as research expenses, Insurance, License and
Permit Fees, Equipment and Supplies and Advertising and Promotion. All businesses need to generate income, and long-
term debt is an effective way to get immediate funds to finance and operations.
Aside from need, there are many factors that go into a company's decision to take on more or less long-term debt. During
the Great Recession, many companies learned the dangers of relying too heavily on long-term debt. In addition, stricter
regulations have been imposed to prevent businesses from falling victim to economic volatility. This trend affected not
only businesses, but also individuals, such as homeowners.

EQUITY FINANCING
Equity financing is the process of raising capital through the sale of shares in an enterprise. Equity financing essentially
refers to the sale of an ownership interest to raise funds for business purposes. Equity financing spans a wide range of
activities in scale and scope, from a few thousand dollars raised by an entrepreneur from friends and family, to giant
initial public offerings (IPOs) running into the billions by household names such as Google and Facebook. While the term
is generally associated with financings by public companies listed on an exchange, it includes financings by private
companies as well. Equity financing is distinct from debt financing, which refers to funds borrowed

VENTURE CAPITAL
- is financing that investors provide to startup companies and small businesses that are believed to have long-term growth
potential. Venture capital generally comes from well-off investors, investment banks and any other financial institutions.
However, it does not always take just a monetary form; it can be provided in the form of technical or managerial
expertise.
Though it can be risky for the investors who put up the funds, the potential for above-average returns is an attractive
payoff. For new companies or ventures that have a limited operating history (under two years), venture capital funding is
increasingly becoming a popular – even essential – source for raising capital, especially if they lack access to capital
markets, bank loans or other debt instruments. The main downside is that the investors usually get equity in the company,
and thus a say in company decisions.
SELLING STOCKS
It means allowing investors to buy shares of your company, which means they actually own a piece of it. Selling bonds
means borrowing money from investors and paying interest to them. Each method works, but there are different
consequences for how you run and grow your company.
ADVANTAGES OF SELLING STOCK
If your business doesn't have a stellar credit rating, you may not be able to borrow the money you need. If you
incorporate, you can sell stock in your company instead. This is particularly attractive if you are a start-up with no track
record. You can attract these investors based on your potential for profit and growth. Selling stock gives you the
advantage of not owing any money to investors, because you are not borrowing. You don't have to make any payments for
the money you raise this way. In addition, a rising stock value can increase your credit rating and make it easier to borrow
money in the future. Also, the constant need to justify your actions to shareholders can give your company a sharp focus
and profitability.

DISADVANTAGES OF SELLING STOCK

By selling shares of your company, you give each investor a piece of ownership. This means you have to answer for all of
your actions to shareholders. You may have to reveal information to them that you would have preferred your competitors
didn’t know. Because they own a piece of your company, they have a right to demand explanations and justifications for
your business decisions. Depending on your company charter that lays out rights and responsibilities of shareholders, they
may have the right to vote on issues affecting your company, the way you acquire and use assets, and how you keep your
records. You may have to offer a monthly or quarterly dividend to provide enough reward for investors to take a chance
on your company. If you have agreed to pay dividends, shareholders have a right to those dividends, and if you default on
a payment, you could hurt your company’s reputation and its stock price. You have to incorporate in order to sell stock,
which can bring tax consequences.