Sources of capital in the enterprise
Finance is a particularly important aspect of any company’s operations. They are connected with every decision taken, which has specific consequences. Thanks to the financial resources, companies are able to examine the effects of the measures taken, the level of their implementation, verify the previously intended plans or restructuring measures. Finance enables effective management of resources and rational decision-making.
Source of financing
Companies, when choosing the source of financing, should first of all answer the question whether they want to finance themselves with equity or debt. The decision on how to finance an asset should be supported by a comprehensive analysis. The criteria taken into account when selecting appropriate sources of capital include: availability, costs, flexibility, leverage effect and service risk.
Differences between sources of capital
The differences between the specific sources of capital are mainly reflected in the company’s cash flow. When financing an activity by debt, an entity undertakes to repay a predefined cash flow (principal and interest) to a creditor. Ownership holders, on the other hand, receive their share of the profits only after they have paid off all their liabilities.
A second significant difference can be seen in the situation of liquidation of a company. Creditors are in a much better position than owners. Lenders’ claims are realized first of all, before the owners, from the company’s assets. In addition, costs related to debt financing (mainly interest) are tax deductible costs, i.e. they should be reduced by the value of the tax, as opposed to dividends paid.
The next difference is in time. Debt has a predetermined maturity, unlike equity, which in theory is perpetual.
Control of the company
A significant discrepancy between equity and debt can also be seen in terms of control over the company. Creditors are not responsible for the company’s decisions, they take a passive position. Shareholders, in turn, have a significant or total influence on the activities of the enterprise.
Before you choose, perform an analysis
Taking into account all the above differences between foreign and equity capital, enterprises should, before choosing the source of capital, conduct a detailed analysis of the entity’s capability, valuables, advantages and disadvantages of capital and other aspects. This practice is very important for the success of the company’s operations in the future.