When a business needs finance, it has to determine the factors that can influence the choice of finance. The managers cannot simply use any source of finance, they need the help of the accounts professionals to see which is the right source of finance. Here are the factors that influence finance choice.
It is important to determine the use of finance and the time period of the finance. It is very risky to borrow long-term finance to pay for short-term needs. Businesses should match the sources of finance to the need for it. There is a possibility that permanent capital may be needed for long-term business expansion. If the finance is needed for short term then it is advisable to obtain short-term finance in order to increase stocks to pay creditors.
The cost needs to be calculated. It is impossible to obtain finance free of cost. Obtaining finance is never free, even internal finance may have an opportunity cost. If the business wants to borrow loans then it might have to pay interest rates. Loans may become very expensive during a period of rising interest rates. Moreover, a stock exchange flotation can cost millions of dollars in fees and promotion of share sale. The account executives have to check how much is the amount required. For example, if a large capital sum is needed the business can obtain it by issuing shares and selling debentures. If the amount needed is small them small bank loans could be obtained or the payment period of trade receivables can be reduced.
Another major factor that an account executive needs to keep in mind is the legal structure. Shares can only be used by limited companies and only public limited companies can sell shares directly to the public. Doing this runs the risk of the current owners losing some control. If the owners want to retain control of the business at all costs then the sale of shares might be unwise.
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