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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Retained earnings are often the preferred source for short‑term, low‑risk projects such as a marketing campaign because:
- Cost: No interest or issuance costs are incurred, making it the cheapest option.
- Flexibility: Funds are immediately available and can be re‑allocated without lender approval.
- Control: Using internal funds does not dilute ownership or introduce external monitoring.
- Use of finance: The purpose is specific and temporary; external financiers may view it as non‑strategic and charge higher rates.
- Existing debt level: Deploying retained earnings avoids increasing the firm’s debt burden, preserving borrowing capacity for future, larger investments.
Consequently, retained earnings align well with the need for low cost, high flexibility, and control while keeping the firm’s leverage unchanged.