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FAQs on Introduction to Sources of Finance - Accountancy and Financial Management - B Com
| 1. What are the main sources of finance for businesses? |  |
Ans. The main sources of finance for businesses include internal sources such as retained earnings and external sources such as equity financing (issuing shares), debt financing (loans and bonds), and government grants. Each source has its advantages and disadvantages depending on the financial needs and structure of the business.
| 2. How do businesses decide between equity and debt financing? | |
Ans. Businesses decide between equity and debt financing based on several factors including the cost of capital, control considerations, cash flow requirements, and the overall financial strategy. Equity financing does not require repayment, which can be beneficial for cash flow, but it dilutes ownership. Debt financing, while it retains ownership, requires regular repayments and can increase financial risk.
| 3. What are the advantages of using retained earnings as a source of finance? | |
Ans. The advantages of using retained earnings include no interest costs, no dilution of ownership, and flexibility in usage as the funds can be reinvested back into the business without external constraints. Additionally, it reflects a positive signal to investors about the company’s profitability and sustainability.
| 4. What are the risks associated with relying on external finance? | |
Ans. The risks associated with relying on external finance include the obligation to repay loans with interest, potential loss of control if equity financing dilutes ownership, and increased financial leverage which can magnify losses during downturns. Additionally, businesses may face restrictions and covenants imposed by lenders that can limit operational flexibility.
| 5. How can small businesses access finance? | |
Ans. Small businesses can access finance through various channels including bank loans, credit unions, crowdfunding, angel investors, venture capital, and government grants or loans. They may also consider using personal savings or loans from family and friends. Each option has different requirements and implications for the business.
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