Advantages And Disadvantages Of Sources Of Finance

In debt financing the interest expense is allowable expense resulting in low tax expense, where as in case of equity finance the cost of equity is dividend, and no advantage can be availed in tax.

The key role of finance in any business is to manage money; whether it be raising capital through share capital and bank loans, raising credit (short-term capital), or handling the costs of the business. Without finance, a business would not function, as quoted by (Griffin, 2015); ‘Money is the lifeblood of a business and finance is the nerve center’.

Debt capital is beneficial because the providers of the debt will not try to control the affairs of the company. This will allow the company to grow without having to worry about any interference from the capital providers.

Now, the advantages of debt capital centre on its relative cost. Debt capital is usually cheaper than equity because, the pre-tax rate of interest is invariably lower than the return required by shareholders. This is due to the legal position of lenders who have a prior claim on the distribution of the company’s income and who in liquidation precede ordinary shareholders in the queue for the settlement of claims. Debt is usually secured on the firm’s assets, which can be sold to pay off lenders in the event of default, i.e. failure to pay interest and capital according to the pre-agreed schedule;

There are several factors that guide the choice among debt financing and equity financing such as potential profitability, financial risk and voting control. Equity financing is a method used to obtain capital in order to finance operations, growth or expansion. Sources of equity financing are extremely important. Major sources of equity financial are Retained Earnings, sale of stock, and funds provided by venture capital firms. Profits that are kept and reinvested are called Retained earnings, which is a very attractive source fund due to the savings it provides to the entity by not paying the interests, dividends or underwriting fees related to issuing securities. This source of financing does not dilute ownership, but it

Working capital is one of the most important key areas that a financial manager has to understand and manage carefully. From the article, smaller organizations or SMEs are clearly at a disadvantage because they do not have the additional manpower present in larger organizations that have a clear purpose of solely managing working capital. Working capital is essentially how liquid the company can be at a given time and it involves current assets and liabilities, which are both short-term. SMEs would have a significant difficulty in expanding due to a lack of funds in the short term. Essentially, there would have to be sufficient current assets in order to pay off our trade payables in order to reduce liquidity risk.

From the perspective of stockholders, debt finance may be more attractive compared with other financial approaches. The reasons are as follows. Firstly, it may ensurestockholders’ ownership unchanged (Mooij, 2012). If the board of the company intend to adopt the approach of equity finance such as issuing new rights, there is a possibility that the former stockholders may not be able to purchase all new issuing rights and then lead to dilution of control which they do not expect. Secondly, debt finance is a relatively cost-effective method as there is tax advantage of debt.If a firm only has equity finance, an extra tax then needed to pay because dividends which come from profits are income for investors which

Financing is a process of providing additional capital by investor or financial institution to the strapped for money entrepreneurs for companies’ needs such as inventory or equipment purchase, advertising campaign, development, etc. If truth be told, alternative

1(a) Financial System is a complex yet connected system that consist of financial intermediaries, financial institutions and financial assets.

In business Finance is obviously important for operation, development and growth. Finance is the lifeblood of business. It can be said that finance can be the most important part of a business enterprise

Task: 2: Be able to analyses the implications of finance as a resource within a business

There are two general forms of financing debt and equity. There are advantages and disadvantages to each, so determining how the company will be financed needs to take that information into account. Debt creates an obligation it must be paid back through the company's cash flows. This in turn increases the riskiness of the company to the owners and it also reduces the opportunities that the company might have for expansion. Also, debt is hard to acquire for a new business. Banks are unlikely to lend to an unproven business, and they certainly will not lend a substantial amount to such a business. Credit cards can be maxed out to start the business, but the high cost of cards makes this a very high risk option.

Financing is needed to start a business and to increase the businesses profitability. There are several sources to consider when looking for start-up financing. The financial needs of a business will vary according to the type and size of the business. For example, processing businesses are usually capital intensive, large amounts of capital. Retail businesses and small businesses usually require less capital. Requiring.

A firm can choose a mix of three modes of financing i.e. issuing shares, borrowing from the market and use of retained earnings. The ratio of this mix of funds purely depends on the firm and known as optimal capital structure of the firm. This leads to the different capital structure theories. These theories explain their

Islamic banks use a number of non-interest-based finance modes. The use of a mode is dependent on the nature, purpose and size of transactions. In selecting the modes, it is very much the know-how and knowledge of the Islamic banker which comes into play. These modes could be classified as debt type instruments, quasi - debt type Instruments, profit and loss sharing or hybrid instruments.