Business – 5.2 Sources of finance – Internal and external sources | e-Consult

Answer:

• Share Capital

  • Advantages

    • No mandatory repayment – funds are permanent capital.
    • Improves debt‑to‑equity ratio, reducing financial risk.
    • Potential to raise large sums through public issues.

  • Disadvantages

    • Dilutes existing owners’ control; new shareholders gain voting rights.
    • Dividends are paid out of profit and are not tax‑deductible.
    • Regulatory compliance and disclosure requirements are extensive.

  • Impact on Control & Risk

    • Control is shared with new shareholders, possibly leading to conflicts over strategy.
    • Financial risk is lower because there is no fixed interest obligation.

• Debentures

  • Advantages

    • Fixed interest cost provides certainty for budgeting.
    • Does not affect voting control – creditors have no voting rights.
    • Can be secured or unsecured, offering flexibility.

  • Disadvantages

    • Mandatory interest payments increase cash‑flow pressure.
    • Principal must be repaid on maturity, adding long‑term liability.
    • Higher financial risk may affect credit ratings.

  • Impact on Control & Risk

    • Control remains with existing owners; no dilution of equity.
    • Financial risk rises due to fixed obligations, especially if profits fall.