Selection of financial sources 2

• Ability to repay

It is required to be vigilant about the movements and patterns of the cash flow of the company. Therefore, the income earned on operating activities that are funded by the borrowed funds should be adequate to meet capital and interest repayments on time. Failure to do so will cause numerous problems to the organization.

• Costs of financing

Various costs have to be incurred from initial stage of fund raising to the final repayment. Few of these costs are costs on documentations, advertising, legal fees, stamp charges etc. In addition to these costs, the borrower has to meet capital, interest/dividend repayments periodically on time depending on the
types of the borrowing. Therefore, it is essential to analyze the costs and benefits of financing a particular financial requirement.

• The nature of the business organization

All the financing sources are not accessible to all the types of business organizations. For example, a sole proprietor and a partnership cannot raise funds by issuing ordinary shares to the public. Therefore, an organization should always select the best and the authorized sources to fund its financial requirements
without going for easily accessible unauthorized sources of financing.

• Period of time given to repay

Certain funding should be repaid within one year whilst some other funding allows them along period of time to repay. If the repayable time is shorter the monthly installment of paying back is higher. Then a considerable amount of the income has to be paid back as installments. It may be a hindrance to the improvement and existence of a business. If the repayable time is longer such inconveniences may not occur.

• The nature of the business activities

When funding, it is essential to understand the nature of the business that the company carries out. For example, the source of funds available for a grocery shop owner may not be appropriate for a wholesale dealer mainly due to the differences in their nature of the business.  

Accordingly, the optimum source of funding for the organisation should be selected after careful evaluation of the various factors affecting the decision. This provides much comfort, profitability and liquidity conditions for the organisation.