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External Sources of Finance - Essay Example

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The selection of an external source of financing is usually one of the most challenging aspects in the establishment of a business enterprise. Acme is therefore at crossroads to evaluate the various options available and select the best source both in terms of cost and efficiency…
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External Sources of Finance
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Download file to see previous pages Financing decisions are normally very fundamental considerations to be made by any multinational corporation like Acme which seeks to venture into large scale operations. As such, the whole prerogative clearly rests on the finance managers to appropriately select the best financing method out of the myriad option available in the world today. The various option of finance that Acme can opt for are lucidly outlined below.
The corporation can opt for the issuance of preference or ordinary shares in order to raise sufficient capital for the foreign expansion. This is a major source of finance for most organizations across the world. Its advantage lies in the fact that it is “non-redeemable”. As such, it is an existing and permanent source of finance that is not to be repaid like other sources of fund. The repayment process only occurs upon the winding up of the company. On the contrary, it can be argued that this form of financing has the disadvantage of diluting the ownership strength of the company since it involves the addition of new shareholders into the company (Steffens 45-9). In the same vein, as the number of shareholders increases, the control of the company becomes very difficult as decision making becomes very procedural and bureaucratic due to the wide consultation needed before any major decisions are made.
Bank loans
Loans from banks and other financial institutions are usually good sources of finance for business organizations. Obtaining such loans is always simple for most large organizations that are known to have wide capital bases. The use of loans as a source of financing has the advantage that it never leads to a loss of direction for the business as in the case of issuance of new shares.
Bank loans are normally long-term sources of finance and can always be obtained in large sums unlike other sources. In most cases, loans are used to buy fixed assets such as vehicles and machinery. The major disadvantage of using loans as sources of finance revolves around the huge interests paid (Gopalan 67). Most banks charge very high interest rates and it therefore becomes unprofitable to acquire loans without the assurance that the business will raise sufficient profits to cover for the high interest rates. Short term loans can also be obtained in form of overdrafts in which case most banks need no collateral. However, bank overdrafts are always charged at very high interest rates than other loans. Debentures The issuance of debentures is also another source of capital that Acme can adopt for its expansion program. Debentures are usually units of loan which a company issues to the debenture holders and are usually traded like shares. The advantages and limitations of using debentures are basically similar to those of most bank loans. The loans are usually obtained from other companies, individuals or financial institutions. In that regard, Acme will then be prepared to repay the debenture holders the interest accrued. One striking characteristic of a debenture is that it is only backed by the company without any form of collateral like other loans. It therefore leaves the company’s assets free which can then be used to obtain further financing in the future. Leasing Leasing is one of the most common sources of financing in the increasingly competitive business environment. In essence, a business cannot purchase all the fixed assets it requires to set up operation in a foreign land. Leasing enables companies to ...Download file to see next pagesRead More
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