SOURCES AND USES OF LONG-TERM FUNDS

What is Long-term Fund?

Long-term funds are used for long-term investments or sometimes called capital
investments. This includes expansion, buying new equipment, or buying a piece of land which
will be the site of future expansion. Long-term funds can also be used to finance permanent
working capital requirements. Long-term investments have to finance by long-term sources of
funds to minimize default risk or the risk that you may not be able to pay maturing obligation.

Different sources of long-term funds:

1. Equity Investors. Equity investors can be issued common stocks. This is the most
patient source of capital. This is the most patient source of capital. As far as the company
is concerned, this is the safest source of financing.
2. Internally Generated Funds. Instead of declaring cash dividends, the company can use
internally generated funds for expansion or to finance other types of capital investments.
3. Banks. Banks are sources of different types of financing form short-term to long-term.
They provide lower interest rates as compared to other financial institutions but they have
a lot requirements and borrower goes through a process, normally taking a month before
a loan get approved.
4. Bond market. This market is gaining more popularity among our big publicly listed
companies for their fundraising activities. To issued bonds, the services of an investments
bank are also needed to underwrite the issued.
5. Lending Companies. These are the same lending companies previously discussed. Some
of them also provide long-term loans ranging from two to five years. These lending
companies can process loan faster but they charge higher interest rates.

When companies have identified good investments opportunities they want to pursue,
financing is generally a combination of debt and equity. It is just a question of how much of
the funding requirements will come from debt and how much will come from equity.