- When a business decides to raise funds, it has several sources of finance to choose from.
- The selection of a source of finance is a crucial decision, and the chosen source can have a significant impact on the business’s growth, profitability, and sustainability.
- It is, therefore, essential to carefully evaluate various factors before selecting a source of finance.
- In this section, we will discuss some of the critical factors that a business should consider when selecting a source of finance.
Factors to Consider When Choosing a Source of Finance:
- Cost of Capital: The cost of capital is the interest rate or the return that the business has to pay to the source of finance. A business should choose a source of finance that provides the lowest cost of capital.
- Flexibility: A business should select a source of finance that is flexible and can be adjusted to the business’s changing needs.
- Availability: The availability of finance is essential. A business should choose a source of finance that is readily available when needed.
- Repayment Period: The repayment period is the time that the business has to repay the borrowed amount. A business should choose a source of finance that provides a repayment period that is compatible with the business’s cash flows.
- Amount of Funds Required: The amount of funds required is a crucial factor to consider when selecting a source of finance. A business should choose a source of finance that can provide the required amount of funds.
- Security: Some sources of finance require collateral or security. A business should choose a source of finance that does not require a high level of security.
- Control: The level of control that the source of finance has on the business’s operations is also a crucial factor to consider. A business should choose a source of finance that does not impose too many restrictions on its operations.
- Time Horizon: The time horizon refers to the period for which the funds are required. A business should choose a source of finance that matches its time horizon.
- Risk Profile: The risk profile of the source of finance is also essential. A business should choose a source of finance that matches its risk profile.
- Tax Implications: The tax implications of the source of finance should also be considered. A business should choose a source of finance that provides tax benefits.
- Reputation: The reputation of the source of finance should also be considered. A business should choose a source of finance that has a good reputation.
- Ease of Access: The ease of access to the source of finance is also essential. A business should choose a source of finance that is easy to access.
- Timing: The timing of the source of finance is also important. A business should choose a source of finance that is available when needed.
- Covenants: Covenants are conditions that the source of finance imposes on the business. A business should choose a source of finance that has reasonable covenants.
- Source of Funds: The source of funds is also essential. A business should choose a source of finance that is compatible with the business’s values and goals.
