Long term sources of finance

Here we will focus only on the long term sources of finance because only long-term sources provide permanent financing. Long-term sources of finance (also called long-term sources of capital) refer to long-term debt and equity on the balance sheet. They include long-term debt, preferred stock and common stock equity, which in turn include issues of new common stock and retained earnings.

Permanent financing generally refers to financing long-term fixed assets, such as machinery or factory. If the pay-off from the asset is over the long-term period (longer than 1 year), the long-term sources of finance should be used to ensure it is less risky to finance such assets. For example, if long-term debt (one of the long-term sources of finance) rather than short-term debt is used, business can be more certain money will be available to cover obligations as they come due.

While focusing on the long-term sources of finance, we will need to focus on the specific cost of finance. We will need to obtain the specific cost of each of the long-term sources of finance, which refers to the after-tax cost of using each of the sources today.

Read related article: Cost of Long Term Debt 

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