FACTORS INFLUENCING THE CHOICE OF A SOURCE OF FINANCE

Business will need to match the source of finance carefully to their specific requirement. What exactly will the finance be used for?

• Cost

• Status and size

• Purpose or use of funds.

• Amount required

• Flexibility

Business will need to consider thoroughly all the costs associated with obtaining a source of finance. Such costs include interest payments, administration costs and costs associated with a share issue.

• Status and size

• State of the external environment

• Flexibility

• Costs

Public limited companies can obtain finance from various sources, whereas sole traders will not be able to. This is because sole traders are less well known and smaller than public limited companies.

• Purpose or use of funds

• Costs

• Status and size

• Flexibility

For small _________, firms may consider mostly short-term sources of finance such as bank overdrafts while, for larger ______, long-term bank loans.

• Amount required

• Flexibility

• State of the external environment

• Costs

In some cases, business will need additional sources at particular points during their trading period which could be influenced by, for example, seasonal changes in demand that may require short-term sources of funding.

• Status and size

• Amount required

• Purpose or use of funds

• Flexibility

This involves factors that the business has no control of. Increases in interest rates or inflation will greatly affect the purchasing decision of both consumers and producers.

• State of the external environment

• Flexibility

• Costs

• Purpose or use of funds