Yash Ltd is having a good liquidity position. It pays dividends to its shareholders regularly. Thecompany has already diluted 45% control in the market by issuing shares. Now, it needs more funds for expansion purpose and wants to have tax advantage too, with this new source.. Advise the company about the source through which it can raise fund, for expansion purpose. Explain the advantages of the suggested source of finance. 5
Answers
Answer:
List of the Advantages of Internal Sources of Finance.
1. It allows an organization to maintain full control.
When you are using internal sources of finance, then you do not have the same repayment commitments as you would with external debt. You don’t need to worry about that payment schedule matching up with your earnings schedule. Your main requirement is to ensure a repayment happens at some point, which means you can schedule your own repayments when it makes financial sense to do it.
2. It improves the planning process.
Firms tend to be more careful when planning new projects when using internal financing compared to external financing. There is no illusion that you have cash to spare when using internal sources of finance. You’re only spending the money that your company has earned or set aside for a project just like the one being considered. That makes it less likely that spending on extraneous things will occur, which creates positive spending habits over time.
3. It reduces the overall cost of most projects.
When you’re using external sources of finance, then the lending generates interest payments that can make borrowing expensive. This happens on the individual level as well. Imagine that you’re purchasing an asset that is $21,000. If you use internal sources of finance for the purchase, you pay the expense and that completes the transaction. Then you can repay the cost monthly, if needed, from other budget lines. With external sources, at a 4% interest rate over 6 years, you’d pay almost $10,000 in interest that wouldn’t be required with internal sources.
4. It improves the overall value of the company.
Investors don’t like to see a lot of external debt with a company. High debt levels indicate more risk, which reduces the overall value of the company. You’ll also see improvements in the credit score of your business if you are utilizing less debt too. Internal financing resources may create expenditures that may be difficult to manage in the short-term sometimes, but from a long-term perspective, managing debt levels will always create long-term financial health for most companies.
5. It limits outside influences on the company.
If you involve people from outside the company with your project, then you’re ceding a certain level of influence to them over the outcome desired. Even if your external financing involves a bank which wants nothing to do with the planning process, you must still prove to the lender that your business plan is a low-risk opportunity to create profits. You must show that you’ll have the ability to repay the financing. That means your decision is influenced by the need to repay instead of the needs of your business at the time.
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