Q.State any three factors that a business should consider before choosing a source of finance.

Choosing a source of finance is never automatic — a business weighs several practical considerations before deciding. …

Before choosing a source of finance, a business needs to weigh several practical factors, since no single source suits every situation. Three important factors are: (i) Cost of raising and servicing the funds — every source carries some cost, whether it is dividend expectations on equity, fixed interest on debentures and loans, or issue/processing expenses, and a business compares the effective cost of the available options before deciding. (ii) The period and purpose for which the funds are needed — a permanent requirement, such as buying a factory building, calls for a long-term source like equity or a long-term loan, while a short, temporary need, such as financing a season's extra raw-material purchase, is better met through a short-term source like trade credit or a bank overdraft, since using the wrong maturity of finance creates a mismatch. (iii) The effect on ownership and control — raising fresh equity capital brings in new shareholders and can dilute the voting power of the existing owners, so a business wishing to retain tight control may prefer borrowed funds or preference shares instead, even though this raises the fixed financial obligations of the business. Oth …

Students often list factors without explaining WHY each matters — for full marks, briefly state the reasoning (e.g. why a mismatch between the fund's period and t …