Factors Affecting Financing Decisions
So far we have seen the factors affecting investment decisions. In this post, we will look at the factors affecting financing decisions. While taking financing decisions, the finance manager keeps in the mind some important factors.
Let’s learn more about it.
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The cost of raising finance from various sources is different and finance manager always prefer the source with minimum cost.
More risk is associated with borrowed fund as compared to owner’s fund security. Finance manager compares the risk with the cost involved and prefers securities with moderate risk factors.
Cash Flow Position
A stronger cash flow position may make debt financing more viable than funding through the equity.
It refers to the cost involved in issue of securities such as broker’s commission, etc. Firm prefers securities which involves less floatation cost.
Fixed Operating Cost
If a company is having high fixed operating cost (building rent, salaries) then they must prefer owner’s fund because due to high fixed operational cost, the company may not be able to pay interests on debt securities which can cause serious trouble for company.
If existing shareholder’s wants to retain the complete control of business then they prefer borrowed fund securities to raise further fund. On the other hand, if they do not mind loosing the control then they may go for owner’s fund securities.
State of Capital Market
Health of the capital market may also affect the choice of the source of fund. During the period, when stock market is rising, more people invest in equity. However depressed capital market may make issue of equity shares difficult for any company.
This was all about the factors affecting financing decisions.
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