Factors Affecting Source of Finance
The choice of the source of finance depends upon a number of factors further depending upon the time, purpose, the type of organization etc. All these factors are to be considered before making a choice of source of funds:
1. Cost:
Both types of cost i.e. the cost of procurement of funds and cost of utilizing the funds should be taken into account while deciding about the source of funds.
2. Financial strength and stability of operations:
The financial strength i.e. sound financial position to repay the principal amount and interest on the borrowed amount is a major factor for this choice. When the earnings of the organization are not stable, fixed charged funds like preference shares and debentures should be carefully selected as these add to the financial burden of the organization.
3. Form of organization and legal status:
The form of business organization and status affects the choice of a source for raising money, e.g. a partnership firm cannot raise money by issue of equity shares.
4. Purpose and time period:
A short-term need can be met through borrowing funds at low rate of interest throughtrade credit, commercial paper, etc. whereas for long term finance, sources such asissue of shares and debentures are more appropriate. Similarly, a long-term businessexpansion plan should not be financed by a bank overdraft which will be required to be repaid in the short term.
5. Risk profile:
Business should evaluate each of the sources of finance on the basis of risk involved. E.g. there is a least risk in equity as compared to a loan that has a repayment schedule for both the principal and the interest. The interest must be paid even if the borrowing company is incurring a loss.
6. Control:
Issue of equity shares means risk of dilution of the control as equity share holders enjoy voting rights. Thus, business firm should choose a source keeping in mind the extent to which they are willing to share their control over business.
7. Effect on credit worthiness:
The dependence of business on certain sources may affect its credit worthiness in the market e.g. issue of secured debentures may affect the interest of unsecured creditors of the company and may adversely affect their willingness to extend further loans as credit to the company.
8. Flexibility and ease:
Restrictive provisions, detailed investigation and documentation in case of borrowings from banks and financial institutions may be the reason that a business organization may not prefer it, if other options are readily available.
9. Tax benefits:
The dividend on preference shares is not tax deductible, interest paid on debentures and loan is tax deductible and may, therefore, be preferred by organizations seeking tax advantage.
International Financing – Different Sources
FAQs
The appropriateness of the different sources of finance depends on several factors including the purpose of finance, cost of finance, duration of finance, required amount of finance, type of the business organization, size and status of the business, gearing level, flexibility and external influences.
What are the factors affecting the choice of source of finance? ›
In conclusion, selecting the right source of finance is a multifaceted decision. It requires a thorough understanding and careful consideration of various factors like cost, flexibility, control, intended use, and existing debt.
What are the factors affecting the selection of source of funds? ›
The factors affecting the choice of sources of funds are the cost that it will incur to raise funds, the purpose and the duration for which the funds are to be raised and the risk that a company has to bear to raise those funds.
What are the 4 main factors that affect your financial decision making? ›
Personal circ*mstances that influence financial thinking include family structure, health, career choice, and age. Family structure and health affect income needs and risk tolerance. Career choice affects income and wealth or asset accumulation.
What is the 4 factors to be considered in choosing sources of short term financing? ›
Choosing the right source of finance is influenced by several factors, including cost, risk, the amount required, and the purpose of the funding.
Which factor affects the financing decisions? ›
Factors Affecting Financing Decisions
Cost: Financing decisions are based on the allocation of funds and cost-cutting. The cost of fundraising from different sources differs a lot and the most cost-efficient source should be chosen. Risk: The dangers of starting a venture with funds differ based on various sources.
What is the source of finance? ›
A source or sources of finance, refer to where a business gets money from to fund their business activities. A business can gain finance from either internal or external sources.
What are the common factors that affect funding? ›
The factors that influence the choice of funding sources for a company include the need for financing to ensure business sustainability, consideration of internal and external factors within the company's environment, the risks associated with debt financing, the costs of raising and maintaining funds, the dividend ...
What are the factors affecting financial performance? ›
The higher the EPS value, the higher the company's profitability and vice versa. The five independent variables that affect financial performance are firm size, net working capital, firm performance, liquidity and financial leverage.
Which three factors affect the financial statements? ›
Financial statements can be impacted by changes in accounting policies, changes in estimates, and correction of errors.
Significant factors include past experiences, a variety of cognitive biases, an escalation of commitment and sunk outcomes, individual differences, including age and socioeconomic status, and a belief in personal relevance. These things all impact the decision making process and the decisions made.
What are the factors affecting the selection of sources of funds? ›
Purpose and Time Period: Business should select a source of finance according to time period for which funds are required. If funds are needed for short term then we can make use of trade credit commercial papers bank loan public deposits etc but if funds are needed for long run then debentures preference shares etc.
What are the factors to consider when choosing a source of finance? ›
the type of business (not all sources of finance are available to all businesses) length of time the finance is required for. finance cost ( interest rates close interest rate The price at which you can borrow money, or the return on how much money you can save.)
What is the riskiest source of finance? ›
The bank loan is considered the riskiest because it is secured by a floating charge on the current assets of the company. In the event of liquidation, the bank loan would have priority over the other sources of finance.
What factors are possible considerations when choosing a financial institution? ›
When choosing a bank, consider factors like security, bank fees, interest rates, location, ease of deposit, and digital banking capabilities. Other important considerations include minimum requirements, availability of funds, customer service, investment account options, and perks offered by the bank.
What are the key factors for choosing the type of financing? ›
Financing can come in the form of debt or investment, and the terms of the financing can vary significantly between the two. Important factors to consider when choosing methods of financing a business include the repayment terms, the total cost of capital and the requirements of the lender or investor.
What are the factors affecting choice in economics? ›
Scarcity, Choice, and Cost
All choices mean that one alternative is selected over another. Selecting among alternatives involves three ideas central to economics: scarcity, choice, and opportunity cost.
What are the factors affecting the choices in accounting? ›
There are four important factors which affect students' career choice in accounting. These are intrinsic factors, extrinsic factors, perceptions toward accounting profession, and other social factors. Under each of these factors, there are important variables which lead students to choose accounting as a profession.
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