Factors affecting the choice of finance
With so many sources of finance to choose from, a business has to carefully select the appropriate one. The following points may be considered while selecting the most appropriate source of finance.
Type of expenditure: Whether the finance is needed for capital expenditure or revenue expenditure. Issue of shares will be more appropriate for limited businesses who want to expand rapidly. If it is a cash flow problem then bank overdraft may be more appropriate.
How long the business needs the finance?
How much amount is needed?
What is the status and size of the business? A small business might not be able to raise additional capital through issue of shares.
What is the capital composition of the business? Highly geared businesses (i.e. with more debt capital and less equity) would rather go in for equity financing.
What will bank see before lending money?
When applying for loan the bank manager or your creditor might be interested in knowing the status of your business. They will review your
- Balance sheet: to see how much you own and how much you owe to others.
- Profit and loss account: to see the profitability of your business.
- Cash flow forecast: Predictions about how much and from where cash will come in and go out.