Long-term finance

• This is finance which is available for more than a year – and sometimes for very many years. Usually this money would be used to purchase long-term fixed assets, to update or expand the business, or to finance a takeover of another business. The main sources of long-term finance are as follows.
• Bank loans:

  These are payable over a fixed period of time.
• Hire purchase: This allows a business to buy a non-current (fixed) asset over a long period of time with monthly payments which include an interest charge.

  Advantages:

  • The business does not have to find a large cash sum to purchase the asset.

  Disadvantages:

  • A cash deposit is paid at the start of the period.
  • Interest payments can be quite high.
• Leasing: renting an asset allows the business to use the asset without having to purchase it.

  Advantages:

  • The business does not have to find a large cash sum to purchase the asset to start with.
  • The care and maintenance of the asset are carried out by the leasing company.

  Disadvantages:

  • The total cost of the leasing charges will be higher than purchasing the asset.
• Long-term loans or debt finance:

  •  Loan interest is paid before tax and is an expense.
  • Loan interest must be paid every year but dividends do not have to be paid if,for example, the business has made a loss.
  • Loans must be repaid, as they are not permanent capital.
  • Loans are often ‘secured’ against particular assets.