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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The choice of finance will be shaped by the following considerations:
- Cost: The business will compare interest rates, issuance costs and any hidden fees. A cheaper source (e.g., a low‑interest bank loan) is preferable if the machinery will generate sufficient cash flow to cover repayments.
- Flexibility: A finance option that allows early repayment without penalty or variable repayment schedules (such as a revolving credit facility) may be favoured if the business expects fluctuations in cash flow.
- Need to retain control: If the owners wish to keep full decision‑making power, they will avoid equity finance that dilutes ownership, preferring debt that does not affect voting rights.
- Use of finance: Since the funds are earmarked for a tangible asset (machinery), lenders may view the loan as lower risk and may offer better terms than for working‑capital needs.
- Level of existing debt: A high existing debt level may limit further borrowing or increase the cost of additional debt, pushing the business to consider alternative sources such as leasing or retained earnings.