Factors Affecting Choice of Finance Flashcards
Firms Objectives
Survival/expansion - Rapid expansion requires a lot of debt. Survival strategies are financed with savings or retained profits, slower and less risky.
Purpose of Finance
Medium term loan, better for machines, overdraft use to finance short-term working capital but not for purchasing assets.
Cost
Better to use internal, cheap, than external. Internal, cheap and flexible. Trade credit is cheap short term external, prompt payments earn discounts. Hire purchase expensive. Cost is the interest, rate of interest affected by economic climate.
Control
Owner not wanting to dilute their control, debt may be the best option; restrictive conditions in loan conditions, may cause loss of control.
Collateral (Security)
If no assets available against a loan, may opt for more expensive finance, which doesn’t offer security e.g hire purchase.
Time Period
Choose source of finance relevant to time. Sale of shares for long term - purchase new building ; trade credit/debt factoring for short term.
Availability and Reliable
Some forms take a longer time to complete e.g mortgage whereas leasing is short and simple.
Flexibility
How easy to change terms e.g repayment period.
Revenue Expenditure
Payment for goods that will be used i.e wages, raw materials, fuel. Shown in profit/loss. Financed over short term sources.
Capital Expenditure
Goods/services that can be used over and over again. I.E vehicles, equipment and new factory. Firm balance sheet. Medium/long term payments.
Risk
Risky ventures harder to raise loan finance (credit crunch). Lenders cautious, want to be repaid.
Gearing ratio, High gearing (high debt proportion to equity). High risk to lenders, choose equity not loan.
Equity
Value of shares issued by company
