Explain any Eight factors that affect the choice of appropriate source

1.	Explain any Eight factors that affect the choice of appropriate source of Business Finance.
Answer» 1. Cost: There are two types of costs., the cost of procurement of funds and cost of utilizing the funds. Both these costs should be taken into account while deciding about the source of funds that will be used by an organisation. 2. Financial strength and stability of operations: The financial strength of a business is also a key determinant. In the choice of source of funds business should be in a sound financial position so as to he able to repay the principal amount and interest on the borrowed amount. 3. Form of organisation and legal status: The form of business organisation and status influences the choice of a source for raising money. 4. Purpose and time period: Business should plan according to the time period for which the funds are required. A short-term need for example can be met through borrowing funds at low rate of interest through trade credit, commercial paper, etc. For long term finance, sources such as issue of shares and debentures are more appropriate. 5. Risk profile; Business should evaluate each of the sources of finance in terms of the risk involved. For example, there is a least risk in equity as the share capital has to be repaid only at the time of winding up and dividends need not be paid if no profits are available. 6. Control: A particular source of fund may affect the control and power of the owners on the management of a firm. Issue of equity shares may mean dilution of the control. 7. Effect on credit worthiness: The dependence of business on certain sources may affect its credit worthiness in the market. 8. Flexibility and ease: Another aspect affecting the choice of a source of finance is the flexibility and ease of obtaining funds. Restrictive provisions, detailed investigation and documentation in case of borrowings from banks and financial institutions. 9. Tax benefits: Various sources may also be weighed in terms of their tax benefits. For example, while the dividend on preference shares is not tax deductible, interest paid on debentures and loan is tax deductible and may, therefore, be preferred by organisations seeking tax advantage.

Explain any Eight factors that affect the choice of appropriate source of Business Finance.

Answer»

1. Cost: There are two types of costs., the cost of procurement of funds and cost of utilizing the funds. Both these costs should be taken into account while deciding about the source of funds that will be used by an organisation.

2. Financial strength and stability of operations: The financial strength of a business is also a key determinant. In the choice of source of funds business should be in a sound financial position so as to he able to repay the principal amount and interest on the borrowed amount.

3. Form of organisation and legal status: The form of business organisation and status influences the choice of a source for raising money.

4. Purpose and time period: Business should plan according to the time period for which the funds are required. A short-term need for example can be met through borrowing funds at low rate of interest through trade credit, commercial paper, etc. For long term finance, sources such as issue of shares and debentures are more appropriate.

5. Risk profile; Business should evaluate each of the sources of finance in terms of the risk involved. For example, there is a least risk in equity as the share capital has to be repaid only at the time of winding up and dividends need not be paid if no profits are available.

6. Control: A particular source of fund may affect the control and power of the owners on the management of a firm. Issue of equity shares may mean dilution of the control.

7. Effect on credit worthiness: The dependence of business on certain sources may affect its credit worthiness in the market.

8. Flexibility and ease: Another aspect affecting the choice of a source of finance is the flexibility and ease of obtaining funds. Restrictive provisions, detailed investigation and documentation in case of borrowings from banks and financial institutions.

9. Tax benefits: Various sources may also be weighed in terms of their tax benefits. For example, while the dividend on preference shares is not tax deductible, interest paid on debentures and loan is tax deductible and may, therefore, be preferred by organisations seeking tax advantage.

Explain any Eight factors that affect the choice of appropriate source of Business Finance.

Discussion

No Comment Found

Related InterviewSolutions

Reply to Comment