Factors Influencing Choice of Business Finance

Factors Influencing Choice of Business Finance

There are various factors influencing choice of source of business finance. These factors are briefly discussed below

Cost

Business enterprises have to analyse the cost of mobilising and utilizing the funds. For instance where the interest rate is relatively lower, public deposits, debentures, term loan etc. may be desirable options.

Financial Capacity of the Firm

Financially sound enterprises have capacity to  pay  interest  promptly   and   return   the capital at the stipulated time. Such enterprises can go for borrowed source. On the other hand, if the firm is not financially stable, it has to depend on owned sources of fund.

Forms of Organisation

The choice of source of fund depends on the form of organisation. Sole proprietor and partnership firms cannot issue shares and debentures. They have to depend on short term sources like bank finance, leasing, hire purchase, factoring, etc. On the other hand Companies, Government organisations and Co operative organisations mobilise funds both from long term sources like shares, debentures, public deposits etc. and from short term sources.

Time Period

The period for which business finance is required determines the suitable source. For instance, where funds are required for shorter period, bank finance like overdraft, cash credit, bill discounting, mortgage, pledge, leasing, hire purchase, factoring and so on, are suitable sources. Funds required for longer period can be tapped from issue of shares, debentures, bonds, term loan and the like.

Risk Factor

Owned funds do not invite any risk while using borrowed funds entails a lot of risk. The probable default in paying interest and capital may lead to the liquidation of business enterprises besides damaging the reputation of the business concern in the business world.

Control

Equity shareholders are real owners of corporate enterprises. They exercise complete control over the management of the company. If the existing shareholders do not like to lose their control, they must not issue more equity shares to supplement the financial resources. Contrarily borrowed sources of funds will not disturb the control exercised by the company management. Hence borrowed source is suitable for maintaining the administrative control of the company.

Stage of Development

A new business enterprise  finds  it  hard  to mobilise business finance than an established firm. Therefore it may have to rely on owned sources in the initial stage. Once the business enterprise has established itself in the business world, they can tap borrowed source of funds and offer its assets as security there for.

Credit Worthiness of Firms

Some sources of funds like debentures and creditors require the business firms to mortgage the assets. This hurts the credit worthiness of the business concern  in  the financial market. Contrarily business concerns do not have to mortgage its assets when they mobilise funds through sources like share capital, retained earnings, unsecured loans, etc. and thereby maintaining good image in the financial market.