Factors Affecting The Choice of The Sourse of Funds

Factors That Are To Be Taken Into Account When Making The
Decisions of Financing Long Term And Short Term

Financial Requirement Of Business are Of Various types long term,
short
term , fixed and fluctuating.

Hence, business firms route to many types of source for raising funds . shortterm brrowing offer the advantage of reduced cost owing to reduction of idle
capital but long-term borrowing are considered as an inevitable requirement
on many grounds correspondingly , equity capital has a vital role to play in
raising funds in a corporate sector . as we are aware , no source of funds is
devoid of limitations , it is sensible to use a combination of source , rather
than relying only on single source there are numbers of factors listed below
that affect the choice of this combination and make it a very
complex
decision for the business.

i.
Cost: here we look at two types of cost viz , the cost of procurement
of funds and cost of utilizing the funds . both these costs should be
taken into consideration While deciding about the source of funds
ii.
used by an organization.
Financial strength and stability of operation : the financial strength
of business also serves as a key determinant . while making the
choice of source of funds business should be financially sound so
that the company is able to repay the principal amount and interest
on the borrowed amount . when the income / financial position of
the organization is not stable , fixed charged fund like preference
shares and debenture should be carefully selected as these add to
iii.
financial burden of organization

Form of organization and legal status : the form of business
organization and status plays a major role in the choice of the
sources of rising funds . for instance a partnership firm cannot
raise money by issuing equity shares as these can be issued only by
a joint stock company .
iv.
Purpose and Time Period : Business should plan based on the time
period for
which the fund are utilized . A short-term need for
example can be dealt by borrowing funds at low rate of interest

through trade credit . commercial paper , etc. For long term finance
source such as issue of shares and debentures are are more
apposite , corresponding , the main purpose for which fund are
required need to be analyzed so that the source is matched which
v.
the utilization of the same.

Risk Profile: Business should analyzed every source of financial in
terms of risk involved. for instance there is minimal risk in equity as
the share capital has to be repaid only at the time of disolvency of
the company and dividends need not to paid if profits are not
generated . A loan on the other hand , has a settlement schedule for
both the principal and the interest .it is mandatory
vi.
to pay the
interest irrespective of the profit or loss incurred by the company .

Control : There are certain sources of funds that may effect the
control and power of the owners in the management of the
company. Issuance of equity shares my lead to dilution of the
control for instance as equity share holders enjoy voting rights,
threr are possibilities for the financial institutions to take control of
the assets or impose conditions as part of the loan agreement. Thus
its advisable for a business firm to analyse the extent to which they
vii.
are willing to share their control over business.

Effect on credit worthiness. The credit worthiness in the market is
affected by the dependence of business on certain sources, for
example, issuance of secured debentures might affect the interest
of unsecured creditors of the company and develop chances for an
adverse affect and their willingness to extend further loans as credit
viii.
to the company.
Flexibility and ease. One another aspecting the choice of a source of
finance is the flexibility and ease in availing funds, restrictive
provisions, detailes investigation, analysis and documentation in
case of barrowings from banks and financial institutions could be

the reason for a business organizations to avoid it. If other options
ix.
are readily available.

Tax benefits. Various other sources may also be weighed with
respect to the tax benefits, for example, as the dividend on
preference shares is not tax deductable, interest paid on debentures
and loan is tax deductible and may, for this reason opt for seeking
tax adventage.

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Factors Affecting The Choice of The Sourse of Funds

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Factors That Are To Be Taken Into Account When Making The

Decisions of Financing Long Term And Short Term

term , fixed and fluctuating.

decision for the business.

financial burden of organization

which the fund are utilized . A short-term need for

example can be dealt by borrowing funds at low rate of interest

the utilization of the same.

interest irrespective of the profit or loss incurred by the company .

are willing to share their control over business.

case of barrowings from banks and financial institutions could be

are readily available.

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