Types of Financial Decisions: Investment and Financing

3760 Words Nov 7th, 2008 16 Pages
Business FinanceIntroductionBusiness finance is concerned with the investment and financing decision of firms. All investment must be financed. Firm raise their finance in various ways; through short term and long term funds. Because resources in this world are scarce, investment involves choice and sacrifice. The firm must choose between rival projects; by choosing some it forgoes others. Since the firm is owned by shareholders, it is expected to make the decision that gives the best stream of return to them. In other words, to make the investment and financing decisions that maximizes the value of the firm.

Sources of FundThere are various sources from which a business can borrow funds for its working capital needs and for its long-term
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It is useful for funding inventory holdings and stock purchase. Usually the term of the bill is 90, 120 or 180 days.

The important advantage in choosing bill finance is the availability of funding with the creditworthiness provided by the acceptance and the variety of bill facilities available.

Inventory loanInventory loan is the leveraging of inventory using the value of the financed equipment/stock as collateral for the loan. It is usually provided by finance company.

Trade creditTrade credit is credit extended by suppliers. In most instances, a grace period is allowed for payment. A business using the trade credit as a source of funds has to bear in mind that the "cost" of this form of financing is already built into the price of the goods by the supplier.

FactoringFactoring allows a company to raise funds by selling its accounts receivable to a factor on a continuing basis, who buys accounts receivables, manages the sales ledger and collects the debts on a continuing basis. Funds from factoring are injected into the working capital of the business, thereby improving cash flow.

The advantage is that factoring provides a large and quick boost to cash flow. This may be very valuable for organization that is short of working capital. Factors generally run an efficient sales ledger. The firm may be able to reduce time spent on credit control. Some customer may respect factors and pay more quickly.

The disadvantages are that factors may want to vet
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