Finance and Sources of Finance

Finance and Sources of Finance

Introduction

In an economy, commercial entities play a very critical role in the development of society and social welfare. All organizations are working day in and day out in order to achieve their specific goals. The nature of all businesses is different from one another, but one thing is common in all of them, and that is requirement of finance. The required money, to manage an organization is called capital, and the cost incurred to acquire such capital is termed as cost of capital. In this assignment, I am going to elaborate why there is a need of finance, how companies acquire finance from various sources and what are the implications associated with the different kind of financing sources. Furthermore, I will also discuss the rationale behind the cost associated with the capital, why financial planning is important for the success of a business, how different sources of finance affect the financial statement of a company.

Section 1

When a business involves in expansion or wants to grow it requires a substantial amount of capital to fulfil its desired objectives. Most of the companies do not possess surplus amount of cash or financial resources to invest in their projects. Acquiring the desired level of financing is one of the most significant and important issue facing a business, weather it is in its initial phases or well established. Companies require finance for investing in land, equipment, new markets, and inventory or for hiring new employees.

Sources of Financing available to a Business

Funds or finance usually transfers from Deficit spending units of an economy to the surplus spending units. A business can borrow required money from different sources of finance available in the economy (Eddie McLane 2006, p.212). Sources from which a company can borrow the required finance are classified into two broad categories internal financing and external financing. Details about each source of financing is given below.

Debt Financing

Debt financing involves Raising of funds through the issuance of bonds and debentures or through the direct borrowing of loan. Debt financing involves payment of a fixed amount of interest payment to its holder (Hui, Wang 2003). Bond holders and lenders have the right to take legal actions against the company if it fails to make payment timely.

Implication of Sources of Financing

Almost everything present in this world carries some disadvantages or possesses some implications. Consequently, each type of financing source has its own kind of implications that need to be address by the financial managers of a particular company. Managers of the company should strive to select an effective mix of financing in order to maximize the shareholders wealth (Jackson, 2007). Research has proven a number of implications associated with each kind of financing source. From those, some vivid implications are given below

Loan financing

If a company selects to borrow a loan from the bank, it will have to pay a fixed amount of annuity payments including interest rate on the borrowed ...