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Summarize six factors to consider when making financing decisions.

      

Summarize six factors to consider when making financing decisions.

  

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Francis
Six factors to consider when making financing decisions
(i) Cost of raising finance: different sources finance has different costs. The objective is to raise funds at minimum cost.
(ii) Risk profile: Different sources have different risk profile. For example, equity is less risky compared to debt since it’s not a must to pay dividend. For debt, a company has an obligation to pay regular interest.
(iii) Control: where a business is family owned and they don’t want to dilute the control, debt is more suitable than equity. This is because debt does not lead to control, but equity does.
(iv) Purpose and period: a company may need to borrow funds for investment in long term assets or just for daily operations. This will determine whether the company will borrow short term or long-term funds, which will also have an impact on the cost of funds
(v) Tax benefits: using debt as a source of fund lead to tax savings because interest is tax
deductible. On the other hand, dividend is not deductible, and therefore, no tax
savings will arise.
(vi) Form and legal status of an organization. A business can either be a sole proprietorship, partnership or limited company. It’s easy for a limited company issue shares in the stock market to raise funds. Private companies, partnerships and sole traders cannot use the stock market to raise funds.
(vi) Financial strength and stability of operations: a business should not use debt where its financial strength is poor or business operations are not stable. This may lead to liquidation, if the company fails to repay its debt.
francis1897 answered the question on November 7, 2022 at 09:33


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