Business – 5.2 Sources of finance – Factors affecting choice | e-Consult
5.2 Sources of finance – Factors affecting choice (1 questions)
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| Factor | Bank Loan (5‑yr, 6% APR) | New Ordinary Shares |
|---|---|---|
| Cost | Interest payable £300,000 over term; fixed cost. | No interest, but potential dividend expectations and dilution of earnings per share. |
| Flexibility | Repayment schedule fixed; early repayment may incur penalty. | No repayment obligation; shares can be bought back later if desired. |
| Control | No change in ownership; lenders may impose covenants. | Existing shareholders’ voting power diluted; new shareholders gain voting rights. |
| Use of Finance | Suitable for a specific, asset‑backed expansion project. | Can be used for any purpose; not tied to assets. |
| Existing Debt Level | Adds to already high debt, potentially worsening leverage ratios. | Does not increase debt; improves equity base, lowering leverage. |
Overall, if maintaining control and avoiding further leverage are priorities, issuing shares may be preferable despite dilution. If cost certainty and retaining full ownership are more important, the bank loan could be chosen, provided the firm can meet covenant requirements.