Final Considerations on Sources of Finance (21.3)

Chapter 21 - Business Finance: Needs and Sources

Class Objective: To understand the factors impacting sources of financing available

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What financing method is the best? Which one should a business pick?

There are many factors influencing the choice of financing to a business:

1. The size and legal form of the business:

• Only PLC can issue shares;

• Small businesses have a hard time getting loans (and high interest).

2. The amount required:

• Bank loans have a limit depending on the business;

• Leasing and hire purchases are limited to the cost of the asset;

• Share issuing and debentures can raise large amounts of financing.

3. The amount of existing borrowing:

• Companies with high amounts of debt find it harder to borrow further financing (risky);

Summary:

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When choosing the best method of financing to a business, therefore, the benefits and limitations should be considered. Extra considerations:

• Retained earnings is cheap but can only be done by profitable businesses but it generates less dividends to shareholders;

• Banks are likely to borrow to profitable/large businesses;

• The type of activity being funded impacts the the source of finance (e.g. mortgage);

• Ownership and control should be considered as it can be lost depending on the source of financing chosen.

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Activity 21.4

Activity 21.5

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To-Do-List:

• Practice Question #2 (p. 358)

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Chapter 21 - Business Finance: Needs and Sources