Factors Affecting Financing Decision:
(i) Cost: The cost of raising funds from different sources are different. A prudent manager will select the cheapest source.
(ii) Risk: The risk associated with different sources of fund is different. More risk is associated with borrowed funds as compared to owner's fund as fixed interest has to be paid and redeemable as well after a fixed period of time.
(iii) Flotation Cost: The costs involved in issuing securities such as brokers commission, underwriters' fees etc. are called as flotation costs. Higher the flotation cost, less attractive is the source of finance.
(iv) Cash flow position of the company: If a company has sound liquidity position then it can easily use borrowed funds and pay interest on time.
(v) Fixed Operating Costs: If a business has high fixed operating costs (e.g., building rent, insurance premium, salaries, etc.), it must reduce fixed financing costs.
(vi) Control Considerations: If the existing shareholders want to retain complete management control then raise finance through borrowed funds but if they are ready for dilution of control over business, equity can be used for raising finance.
(vii) State of Capital Markets: The capital market conditions also affect the choice of source of fund. If the capital market is raising, finance can easily be raised by issuing shares but during depression period, issue of equity share is difficult.