Factors to Consider when Choosing a Source of Finance
- There are many factors that managers must consider before deciding upon the type and source of finance required
- They may need to use more than one source of finance at the same time
Diagram: Factors Affecting the Suitable Choice of Finance
The level of existing debt may be so high that a business will rather sell shares than borrow more
An Explanation of the Factors Affecting the Choice of Finance
Factor to Consider |
Explanation |
What is the purpose of obtaining finance? |
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How long is the finance required for and when can it be paid back? |
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How much finance is needed? |
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What is the legal structure of the business? |
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How much risk is involved? |
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How much control and ownership does the company want to keep? |
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Reducing the risk of being unable to raise finance
- This risk of not being able to raise the finance can be reduced in several ways
- Bank loans will most likely be approved when
- A business presents a convincing business plan including a cash-flow statement, and income statement for the last time period
- Existing sources of external finance are minimal and being managed effectively
- A business has collateral to reduce risk to the bank
- Investment from shareholders will most likely happen when
- The share price is improving
- Dividends are generous
- The company has good profit potential and is planning to grow
- Alternative investments are less attractive