Question

List and Explain 3 ways in which business can finance their fixed Assets. What are some of the places where businesses can go for asset financing? Which source would you recommend and why?

Answer 1

3 ways in which business can finance their fixed assets are :

PROFITS

When businesses earn profits (their sales are greater than costs), they can choose to reinvest some of these profits in Facilities, systems,and R&D. Reinvesting one's own income is a primary source of financial resources for many establIshed companies.

BORROWINGS - BANK LOANS AND BONDS

When a company has a record of at least earning significant income, and still better making profits, the company can make a reliable promise to pay interest, and so the company can borrow money. Companies also have two main borrowing methods: banks and bonds.

A bank loan to a business operates much the same way as a loan to a person who purchases a car or a house.

The company borrows an amount of money, and then promises to repay it over a fixed period of time, including some interest rate.

Another source of financial capital is a bond. A bond is a financial contract: a borrower agrees to repay the amount that was borrowed and also a rate of interest over a period of time in the future.

ISSUING SHARES / DEBENTURES

A company receives money from the sale of its shares only when it sells its own shares to the public (including individuals, mutual funds, insurance companies and pension funds). First stock sale to the public by a corporation is called an initial public offering (IPO).

The money received after issuing shares is used by businesses for expansion purposes.

Businesses can go to Banks, Factoring Institutions look for Angel Investors to finance there assets.

I would recomend Issuing Shares/ Debentures as they are the long term sources of finance which conserves operational cash flows.Many banks provide for 3 to 7 year term loans, a major source of long-term debt for small businesses.

When a company makes use of these funds to develop infrastructure, purchase equipment or buy supplies, it does not use operating cash flow.

When a company uses long-term debt to fund its assets, it essentially leverages its earnings to grow the company.

Another advantage of incorporation or issuing debentures is that there is No or Minimal Investor Interference.