Selection of financial sources 1

In selecting the best method of financing for an organization, the following factors should be considered. It is important to select the most economical and appropriate source of financing.Therefore let us consider some important factors in selecting sources of financing.

• The nature of the requirement 

• Costs of financing

• Collateral requirements 

• The nature of the business organization

• Terms and conditions imposed 

• Tenure of the facility on the borrower

• Flexibilities in obtaining the facility

• The nature of the business activities

• Ability to repay

 

•  The nature of the requirement

It is required to identify the exact requirement that is to be financed. Short term financial requirements should be financed by short term means whilst long term financial requirements are financed from long term means.

• Collateral requirements

It is required to produce securities/ collateral in obtaining loans specially from banks and other private sector institutions. Generally, the most of securities are lands, buildings and other types of fixed assets. The ability to produce acceptable securities will enhance the ability to meet financial requirements.

• Terms and conditions imposed on the borrower

Lending institutions will impose different terms and conditions on the operations of the business. Sometimes, the lending institution can order the borrower to cease the use of the mortgaged property and recover the loan if the borrower defaults in paying interest and/or capital on time. In addition to this, the lending
institution can charge a penal rate on defaults or delays in meeting these requirements.

• Flexibilities in obtaining the facility

The documentation requirements and the processes that the borrower has to go through in obtaining the loan is also an important factor to be considered. In this process, it is required to produce various documents, guarantees etc. The time taken for these activities varies from one lending institution to another.