Sources of business finance – conclusion

Business financing is a critical component of business establishments whether in their start-up or advanced stages. For start-up entities prospective owners may lack adequate capital to effectively roll out the new business operations. For existing entities financing forms an important component in expanding activities without curtailing the effectiveness of existing operations. The aim of this paper was thus to evaluate alternative sources of finance to inform on when a particular mode of financing would be appropriate to the business.

Based on the comparisons outlined various benefits and drawbacks of using different financing modes are identified. The main distinction of these sources is whether they allow lender involvement in the control of business or they avoid such control in favor of financial returns on advanced amounts. Based on such assessment the choice of financing mode may thus be influenced by factors such as business risks involved, the required financial flexibility and the extent ownership risk aversion. Whereas equity financing sources lead to cessation of partial control to the lenders and future payments in terms of dividends, debt financing sources lead to financial costs in terms of interests and are associated with a higher business risk. To evaluate the costs of debt financing alternatives, the APR could provide a guide to the least expensive debt lenders.

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