4 Tips to be considered for Business Financing Decisions

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Business financing  is the financing of long-term loans based upon a complex financial structure where project debt and equity used to finance the business are paid back from the cashflow generated by the business.

Key Business Considerations: The key Business Considerations which are relevant for Business financing decisions are:
COST

In general the cost of debt funds is lower than the cost of equity funds. The primary reason is that the interest payable on debt capital is tax- deductible expense whereas dividend payable on equity capital is not.

RISK

The two main Sources of risk for a firm are: Business Risk and Financial Risk. Business risk refers to the variability of earnings before interest and taxes and arises mainly from fluctuations in demand and variability of prices and costs. Financial Risk represents the risk arising from financial leverage.

CONTROL

From the point of view of the promoters of the project, the issue of control is important. They would prefer a scheme of financing which enables them to maximize their control, current as well as potential, over the affairs of the firm, given their commitment of funds to the project.

FLEXIBILITY

 This refers to the ability of a firm to raise further capital from any source it wishes to tap to meet the future financing needs. In most Practical Situations, flexibility means he firm does not fully exhaust its debt capacity. Put differently, it maintains reserve borrowings powers to enable it to raise debt capital to meet largely unforeseen future needs.

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