Question

Explain the different long-term financing options for businesses. A. What factors influence whether companies fund internally or externally? B. Which type of funding are you more likely to need if you run a small doctor’s office that does not have much growth compared to a large hospital system that is growing rapidly with the demand for high amounts of capital?

2

Answer 1

Long-term financing options are the one which are repaid over a period of more than a year. Someof the long-term financing options are-

1. Equity shares- these are the shares issued to the general public. These are non-redeemable. The holder of such shares has the right to vote, share of profits and calim over the assets of a company.
2. Preference Shares- the holder of these shares doest not have the rights same as equity share holder. However, they get fixed profits and at time of liquidation gets paid before the equity shareholders.
3. Venture funding- these are form of private equity funding. These are provided by the venture capital firms to the early stage companies that have high growth potential or has demonstrated high growth.
4. Bond and debentures- the major difference between bonds and debentures is that, bonds are backed up by the asset of the issuer and the debentures are not backed by any physical assets or collateral.
5. Retained earnings- The retained profits of the business are know as reatined earnngs.
6. Term Loans- it is the loan which is paind in several installments over a long period of time. These usually last between 1-10 years. However, in some cases it may extent to many more years.

A) Some of the factors affecting the choice of internal and external fundings are

1. Size of the business- the size of the business organisations affects the choice of business. Usually small firms go for internal fundings and large furms go for external funding depending on their need.
2. Nature of business organization- Usually the service oriented sectors rely on internal funding and manufacturing concern goes for external funding.
3. Purpose- the need and purpose for funding is a major factor that influence the choice of funding.
4. Control/Ownership- usually in  long-term financing , when the company go for external funding, they loose some control over the company which the third party used to supervise. So if the business is going for external funds they should critically analyse this point.

B) Usually with small doctor's office where these are less scopes for growth, I would choose internal fundings or manybe a short-term bank loan because less scopes of expansion.

However, for large hospital I would choose long-term financing as its easier to repay over a long period. The cost of growth will be substituted with long-term financing from an external source.