Cost:
The cost of raising funds from different sources are different. A wise finance manager opt for the cheapest source of finance.
Cash Flow Position of the Company:
A stronger cash flow position may make debt financing more viable than funding through equity.
Fixed Operating Cost:
If a firm is having a higher fixed operating burden like payment of interests, premiums, salaries, rent, etc, then it should avoid financing through debt. This is because it will further increase the interest payment burden and the firm can reach an unfavourable position. However, if the firm has lower operating cost, then the firm can borrow funds.
Control Considerations:
Issue of more equity may dilute shareholders’ control over the business. Therefore, a company afraid of a takeover bid may prefer debt to equity.
State of Capital Market:
If the stock market is rising, then it is easy to sell equity shares. But in a depressed capital market, the company has to opt for debt financing.
Return on Investment (RQl)
Return on Investment means the earnings of a company on its investments. It is an important criteria for deciding the type of funds to be sourced.
Regulatory Frame Work:
The Companies Act and SEBI guidelines must be observed while raising funds from the public. Government has laid down certain norms for debt equity ratio and ceilings on public deposits. Borrowings from banks and other financial institutions, require fulfillment of certain norms. Thus, the relative ease with which their procedures ’ and norms can be met, has an impact on the choice of the source of finance.
