Long-term Sources of Permanent Working Capital
The long-term sources of working capital include equity and preference shares, retained earnings, debentures, and other long-term debts from public deposits and financial institutions. The long-term or permanent working capital requirements should be met through long-term sources. The financing of working capital through long-term sources of funds is generally costlier than that of short-term sources of funds. However, financing of working capital from long-term sources provides stability, reduces the risk of repayment, and increases the liquidity of the business concern.
Various long-term sources of working capital
are as follows:
Issue of Shares:
It is the primary and most important source
of regular of permanent working capital. Permanent working capital should preferably
be raised by issuing equity shares as it does not create any burden on the
income of the concern, nor the concern is under any obligation to refund the
capital.
Retained Earnings:
Retained earnings or accumulated profits
is a permanent source of regular working capital. It is a regular and cheapest
source of capital. It does not create any charge on future profits of the
enterprise. Retained earnings may be represented by different uncommitted
reserves and surpluses, or specific reserves created out of profits. Generally,
a part of earned profits is ploughed back annually by the firm for meeting its
increasing regular working capital requirements.
Issue of Debentures:
Funds for permanent working capital can also be raised by the issue of
debentures. The cost of capital in this case is lower. However, tapping this
long-term source of regular working capital depends upon the viewpoint of
management, the nature of the business, the condition of the capital market, etc. But, the issue of
debentures as a means of regular working capital creates a fixed charge on the future earnings of the concern.
On one hand, a company may avail the benefits of trading on equity by raising the required regular
working capital out of the proceeds of the issue of debentures, but on other hand, at the
same time, it also faces the risk arising from the non-payment of interest thereon,
if there is no stability in its earnings. Thus, management should make a wise
choice in procuring funds by issue of debentures.
Long-term Debts:
Another important source of regular working
capital is long-term debts from public deposits and specialized financial institutions, such as--the
Industrial Development Bank of India, the Industrial Finance Corporation
of India, the Life Insurance Corporation of India, Commercial Banks, etc.
However, the cost of funds obtained from
the term-lending institutions is relatively higher and also creates a fixed
charge on the company's future earnings.
Other Sources:
The sale of idle fixed assets, and securities
received from employees and customers are some other sources of meeting the
permanent working capital requirements of a business concern.
