Factors of Finance; Finance can define as an administrative area or organization or group of administrative functions related to cash and debt systems that can ensure the organization’s cooperation in providing the necessary resources to adequately fulfill its objectives. Source of finance factors, Now the question arises as to what factors affect the company’s financial system.
Here is the article to explain the question of What are the factors affecting the choice of source of Finance?
In response, it can say that companies or corporations usually need fixed capital and working capital. There are many sources of finance for a company. Finances need for different purposes, and different purposes require the most suitable source of funding for them. There are several factors to consider when choosing the right funding source. Factors to consider when selecting an appropriate finance (funding) source are:
Type of activity (Nature of Business):
If the nature of the business or company requires heavy machinery and equipment to manufacture products, significant investment capital requires; otherwise, less investment capital requires. On the other hand, if the nature of the business is the production of consumer goods, the financial needs will be large.
Amount of money needed:
This is a number that the organization wants to increase. Not all funding sources provide all funding. Some sources are not able to raise large amounts of money while others are not flexible enough to handle the small amounts of money a business needs. Therefore, it is necessary to determine the amount of money the company needs to choose the right funding source.
For example, taking a business loan is not appropriate for short-term and small cash flow problems, as the loan may have a minimum amount that can borrow; so taking a bank overdraft would make sense if the money could borrow in small amounts. . Amounts and overdrafts can pay off quickly. Therefore, the amount of money is an important factor when choosing a source of finance.
This refers to the time a company can spend raising funds. If the company has enough time before its financial needs are met, then the company can spend time looking for alternative sources of cheap funding. On the other hand, if a company wants money quickly, it will have to make sacrifices and accept funding sources that can be even more expensive. The urgency of funding also needs to assess as some funding sources take longer to collect than others.
For example, issuing shares is a very long and complex process where there are legal requirements and then potential shareholders have to inform (advertising), and finally, money collects through application and distribution, which takes longer.
Cost of funding sources:
Different sources of funds have different costs. It is always more profitable for the company to find and obtain cheaper sources of finance. However, sometimes time does not allow organizations to find cheaper sources of funding. Internal funding sources are always cheaper than external funding sources.
The risk consists in the certainty that the financing will generate a return for the lender of the investment made. In simpler terms, it is a guarantee of project success. If financiers do not convince that the project in which their money invest is likely to be unprofitable, the lender will not want to provide funds to the company. In this case, money can secure by assets as collateral, stimulating lenders to lend.
This is the period of time where money will need. This can be short-term (within one year), medium-term (one to five years), or long-term (five years or more). By determining the duration of funding needs, organizations can eliminate inappropriate funding sources and choose funding sources that are more suitable for the required time period.
Business transfer rates:
The transfer rate plays an important role in the availability of funding sources because the transfer rate shows the ratio of debt to the total capital of a company. If the business is highly focused, commercial lenders will not want to lend because the company is already using more credit than equity. Very focused companies must pay more than their profits in the form of interest on loans and other loan capital. When this happens, potential lenders fear the company’s ability to handle more interest payments and debt settlements.
The existing shareholders of the company will not want to issue shares because it will reduce control of the business. Issuance of shares in stock companies also allows takeovers. The same is true for venture capitalists, where money invests as equity, and venture capitalists, as owners, have the right to influence the way the company is run. Existing shareholders and business owners who do not want a change in control and ownership of the company will forgo sources of equity financing.
Economy (Business Cycle):
When the business cycle is booming, capital requirements remain low, but working capital requirements increase.
Forms, philosophies, and styles of leadership and management:
Financial requirements are influenced by the form, philosophy, and style of management within the company. If the business is run by a professional and has a good reputation in the financial markets, then the business may not require a large number of funds.
On the other hand, if management carries out according to traditional methods and places greater emphasis on confidentiality, the financial requirements are much higher. It lists and describes the financial factors that affect firm value. And also the factors that influence the selection of the company as a source of funding.
In addition to the factors above, many other factors or elements also affect the financial management of a company. Above, maybe you’ll understand the factors affecting the choice of source of finance. These are the availability of transportation, opportunities to increase the circulation of money, government policies, opportunities for war, etc.