In acquiring funds to finance major projects, how should management choose from among the alternatives?

The important alternatives available for financing projects are:

• Equity financing
• Debt financing
• Retained earnings

Choosing from the above alternatives depends on the amount of fund, duration of the project, cash flow nature of the entity etc. If the entity has enough cash flow to meet cost of interest, then opt for debt financing. If the requirement is for short term, equity financing is preferred.

Retained earnings:

• No additional cost like interest payment
• No dilution of control or ownership in the entity
• IRR should be better than the ROI of the business

Debt financing:

• No dilution of control or ownership in the entity
• It attracts cost of interest payment
• Interest payment is tax deductible
• Decreases working capital

Equity financing:

• Cost of financing is less compared to debt financing
• Increase in working capital
• Low debt to equity ratio attracts investors
• Sharing of ownership

Types of financing

Generally the types of financing available to entities are through debt, equity financing, using retained earnings or combination of debt and equity. Debt financing is about taking loan from banks or money from creditors whereas equity financing is attained by issuing shares.