Factors Affecting the Choice of the Source of Funds are:
(i) Cost: Here we look at two types of cost viz., the cost of procurement of funds and cost of utilising the funds. Both these costs should be taken into consideration while deciding about the source of funds used by an
organisation.
(ii) Financial Strength and Stability of Operations: The financial strength of a business also serves as a key determinant. While making the choice of source of funds, business should be financially sound so that
the company is able to repay the principal amount and interest on the borrowed amount.
(iii) Form of Organisation and Legal Status: The form of business organisation and status plays a major role in the choice of a source for raising funds. For instance, a partnership firm cannot raise money by issuing equity shares as these can be issued only by a joint stock company.
(iv) Purpose and Time Period: Business should plan based on the time period for which the funds are utilised. A short-term need for example can be dealt by borrowing funds at low rate of interest through trade
credit, commercial paper, etc. For long term finance, sources such as issue of shares and debentures are more apposite.
(v) Risk Profile: Business should analyse every source of finance in terms of the risk involved. For instance, there is minimal risk in equity as the share capital has to be repaid only at the time of solvency of the
company and dividends need not be paid if profits are not generated. A loan on the other hand, has a settlement schedule for both the principal and the interest. It is mandatory to pay the interest irrespective of the profit or loss incurred by the company.
(vi) Control: There are certain sources of fund that may affect the control and power of the owners in the management of the company. Issuance of equity shares may lead to dilution of the control. For instance,
as equity share holders enjoy voting rights, there are possibilities for the financial institutions to take control of the assets or impose conditions as part of the loan agreement. Thus, it is advisable for a business firm to
analyse the extent to which they are willing to share their control over business.
(vii) Effect on Credit Worthiness: The credit worthiness in the market issuance of secured debentures might affect the interest of unsecured is affected by the dependence of business on certain sources. For example, creditors of the company and develop chances for an adverse effect and their willingness to extend further loans as credit to the company.
(viii) Flexibility and Ease: One another aspect affecting the choice of borrowings from banks and financial institutions could be the reason for a provisions, detailed investigation, analysis and documentation in case of
a source of finance is the flexibility and ease in availing funds. Restrictive business organisations to avoid it, if other options are readily available.
