If you are looking to fuel fresh finance in to your business…wait!!... take a wise look on the following factors..

Capital is the backbone of every business. Although, in all aspects capital doesn’t necessarily mean cash, it can be comprise of cash equivalent or fixed assets that we very often find in self proprietorship or partnership firms. Also in course of conversion of any self proprietorship in to a company we can observe personal assets of the proprietor invested in the business are either taken back by the proprietor or subsidized by equivalent amount of share in the capital & of course the ownership of the property is immediately transferred to the company. However, in general terms, capital forms in finance. Now if one needs to extend his capital base due to new undertakings or expansion of existing business, selection of the best source of finance out of several other alternatives is quite crucial. In this aspect, the decision should be rest in the respective cost of each source of capital & estimated return on investment (ROI) of the new as well as expansion of the existing business. As such, if the calculated ROI is higher than the cost of capital, financing decision should be made on fixed interest bearing securities i.e, term loans, debenture etc. Further, the rate of interest is to be settled upon a negotiation between the lender & borrower in terms of financial stability, future viability & past records etc. For a company, generally a syndication among all the representative of the financial institutions & authorized representative of the company are called in. Often this entire process is undertaken by a investment bank. However, for a unstable company looking for capital reconstruction, finance through fresh issue of equities will be ideal as for these companies very often cost of capital remains at a higher side than ROI, if any. Henceforth financing through fixed interest bearing securities can be prove critical in terms of future uncertainty. Although, as I have said if ROI is greater than Cost of Capital, we will prefer for fixed charge carrying financing option, however the theory has got certain amount of limitation in terms of unforeseeable future. As we can’t sure on future, one need to take maximum possible caution in calculating future estimated cash flows. On the other hand, the theory of financial leverages also proves the fact that in the favorable scenario, financing through fixed interest bearing securities indirectly helps the equity share holders by appreciating the net worth of the company.