The cost of floating a debt is generally less than the cost of floating an equity and hence it may persuade the management to raise debt financing. For the sale of some specific products and services, there are some requirements for the preparation of legal documents. Hence, from the point of view of control, debt financing is recommended. The costs of floating as a percentage of total funds decrease with the increase in size of the issue. The capital structure should provide for the minimum cost of capital.

Article shared by: ADVERTISEMENTS: The following points are taken into consideration while selecting a form of business organisation: 1. Account Disable 11.

Factors Which Should Be Kept In Mind Before Selecting A Hotel Hiring the services of a hotel can prove to be quite tricky and cumbersome. But debt is still a cheaper source of finance than even preference capital because of tax advantage due to deductibility of interest.

All you need to know about the June 2020 results, Factors to consider when choosing a source of finance, Click to share on Twitter (Opens in new window), Click to share on Facebook (Opens in new window), on Factors to consider when choosing a source of finance, O Level Computer Science: Software: Operating Systems: Personal Computers, O Level Computer Science: Software: Operating System, O Level Computer Science: Hardware: Point Of Sale Terminal, O Level Computer Science: Hardware: Automated Teller Machine, O Level Computer Science: Hardware and Software: Introduction, There are a lot of things a business needs to consider before settling on the best source of finance to use, Some sources of finance are ill suited for raising large amounts of money for example bank overdrafts have a limit as to how much can be withdrawn, In this instance it would be best to use sources such as dentures, share capital or long term leases, Some sources of finance are also ill suited for raising small amounts of money for example it would be imprudent to issue new shares to finance the day to day operations of the business such as paying wages, It would be best in such instances to use sources such as a bank overdraft, Long term sources of finance are better suited to finance capital expenditure projects for example building a new factory plant, Short term sources of finance are more suited to finance revenue expenditure projects such as paying suppliers, Where the money will be tied up in the project for a long period of time it would be prudent to use long term sources of finance such as debentures, shares and long term loans for example when raising money to build new factory plant, If the money is required only for a relatively short period of time it would be best to use short term sources of finance such as overdrafts, If the business is large and has collateral security which it can use to borrow then it can consider borrowing from financial insitutions, If the business is smaller and lacks the collateral security to borrow, borrowing might not be an option for them, Gearing refers to what proportion of a business’s assets are paid for by debt finance, A highly geared business should consider using equity finance instead so as to reduce their level of risk, A lowly geared business would do well to consider debt finance, Some businesses transfer their yearly profits to special/General Reserves, This is a form of ploughing back profits but holding it in special “funds”, If a business has say a Fixed Asset Replacement Reserve it can use that instead of looking for external sources of finance, A highly profitable business can also make use of retained earnings to finance its operations and projects, The available sources of finance must be ranked according to their capital cost, It is best to go with the choice of finance that the business can afford. Investors who are over-cautious and conservative prefer safety of investment and stability in returns and hence debentures would satisfy such overcautious investors. The factors are: 1. Graeme Donnelly is an entrepreneur with multiple businesses, with almost 20 years' experience. You need to properly identify the sources through which you will be able to get the funding for your business.

Period of Finance and Others. Or, read our business tools page for more information. Business risk can be internal as well as external. “The next factor that needs to be considered is the completion of legal documents. Its present borrowings are: The sales of the company are growing and to support this the company proposes to obtain an additional bank borrowing of Rs. The requirement of investors is another factor that influences the capital structure of a firm. The personal considerations and abilities of the management will have the final say on the capital structure of a firm. Managements which are experienced and are very enterprising do not hesitate to use more of debt in their financing as compared to the less experienced and conservative management. However, if the funds are required for unproductive purpose or general development on permanent basis, we should prefer equity capital. Control 8.

All public utility concern has different capital structure as compared to other manufacturing concern. Quality Company Formations has worked with Barclays, Lloyds and Namesco. On the other hand, dividend on shares is not an allowable expense for that purpose. Schools will reopen for everyone in phases.

The earnings per share also increase with the use of preference share capital but due to the fact that interest is allowed to be deducted while computing tax, the leverage impact of debt is much more. Find your perfect website builder with Startups, Get your business online and start making money today, Business bank accounts are an essential tool for new businesses.

Capital Market Conditions 11. However, in case funds are needed on permanent basis, equity share capital is more appropriate. Cash Flow Ability to Service Debt. Cut out the risk and give your startup the best chance of success by following these seven top tips from Quality Formations' Graeme Donnelly... Are you planning to start a business of your own? Whenever additional funds are required by a firm, the management of the firm wants to raise the funds without any loss of control over the firm. Terms of Service 7. factors to be considered are: 1. “You need to know what your competitors are doing and what are their strategies? Is this the first time you're building a website? (iii) Promoters hold at least 25% of the equity capital. Image Guidelines 4. However, in this process, you will be needing the help of some experts. The legal restrictions are very significant as these lay down a framework within which capital structure decision has to be made. A firm which shall be able to generate larger and stable cash inflows can employ more debt in its capital structure as compared to the one which has unstable and lesser ability to generate cash inflows.

Uploader Agreement, Read Accounting Notes, Procedures, Problems and Solutions, Learn Accounting: Notes, Procedures, Problems and Solutions, Risks Involved in Capital Structure Decisions, Capital Structure: Forms, Importance and Planning, Calculation of Point of Indifference | Capital Structure, Factors Affecting Capital Structure: Top 32 Factors, 7 Main Steps for Installation of a Costing System, Controlling: Meaning, Definitions, Characteristics, Principles, Types and Techniques. : Business risk refers to the variability of earnings before interest and taxes. Selecting a topic on which there is not any source material available can make your writing very difficult. Updated: Aug 7, 2020 Published: May 5, 2017. ZIMSEC O Level Business Studies Notes: Factors to consider when choosing a source of capital. There will be a lot of risks and hurdles you will face in this process and the only thing that can save you will be your positive attitude. Usually, debt is a cheaper source of finance compared to preference and equity capital due to: (iii) Repayment of loan and priority in payment at the time of winding up of the company.

Preference shareholders and debenture holders do not have the voting right. The liquidity and the composition of assets should also be kept in mind while selecting the capital structure. When a firm uses more and more of debt in its capital mix the financial risk of the firm increases. Next, visit our 10 steps to starting a business for more ways to help you get going and set up your startup. Discover the different ways of raising finance. Financial Leverage 2. The choice of the securities is also influenced by the market conditions. Explore our business ideas hub and get inspired.

Whenever a firm wants to raise additional funds, it should estimate, project its future cash inflows to ensure the coverage of fixed charges. Investors which are less cautious in approach will prefer preference share capital which provides stability in returns. It may not be able to pay the fixed interest charges to the suppliers of debt and they may force to liquidate. 25 lakhs.

On the other hand, a concern which cannot provide stable earnings due to the nature of its business will have to rely mainly on equity capital; similarly, small companies have to depend mainly upon owned capital as it is very difficult for them to raise long-term loans on reasonable terms and also cannot issue equity and preference shares at ease to the public.
High rate of corporate taxes on profits compel the companies to prefer debt financing, because interest is allowed to be deducted while computing taxable profits. However, leverage can operate adversely also if the rate of interest on long-term loans is more than the expected rate of earnings of the firm.

Management, Financial Management, Capital Structure, Determination, Factors. Financial risk is associated with the capital structure of a company.
Similarly, the rate of growth in sales also affects the capital structure decision. A company with no debt financing has no financial risk.

Make sure you already have an adviser who can provide you with the best advice at the hour of need. The capital structure of a firm is highly influenced by the growth and stability of its sales.

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