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Investing is one of the most important aspects of firms and organizations across the globe. In line with this, organizations and firms across the globe have taken initiatives to invest in different parts of the globe. Among them is Acme, a multi-billion public MNE that is incorporated in the United States. Following this point, it is important to mention that Acme, has been laying strategies to acquire an overseas production facility that would costs US$500 millions. Numerous proposals have been made in regard to raising this amount of money. Among these proposals is external financing. In this regard, this report will examine different external financing alternatives that are available in the contemporary corporate world, their advantages and disadvantages as well as proposing the most appropriate alternative(s).
Research Findings and Discussion
Research and studies indicate that there are different external financing alternatives that are available in the United States. Before delving deeper into these alternatives, it is important to state that external financing of investments among companies and organizations is an expensive undertaking as compared to internal financing. In reference to Lyandres (2007), external financing was costly on the optimal timing of a firm's investment. There are different external financing alternatives that have been identified in the market so far. These include bank loans, leasing, bond finance and trade credit.
Bank loans are the most commonly used external financial sources. Essentially, commercial banks engage in the lending business by providing both individuals and corporate finances that they have to pay back within a particular period of time with a certain percentages or rather interest. Bank loans have both advantages and disadvantages as a form of external financing.
Advantages of Bank Loans
To begin with, bank loans can be secured within a short period of time. This is one of the most important aspects of bank loans in regard to acting as a source of external finance. In this respect, Acme could easily acquire finances for its investment within a short period of time. Apart from acquiring bank loans within a short period of time, research and studies of banks as financial institutions indicates that most bank finances can be used to invest in a diverse environment, as long as the investments are legal and meet all the requirements that have been set by a particular industry. For instance, Blasi (2008), there are four different standard categories of loans that could be utilized to investment in different sectors of industries (p.163). In consistent with this, there were no limitations in terms of investment using bank loans.
Disadvantages of Bank Loans
There are different disadvantages that are associated with using bank loans as external financial alternatives. To begin with some loans have prepayment penalty. In this regard, the borrower would be charged an extra cost if he or she paid off the loans earlier than the agreed period. Similarly, the use of bank loans is also limited to the agreed upon projects. In other words, one cannot spend a bank loan on anything else except that which is agreed upon with the bank. Therefore, even if an urgent issue arises outside what was agreed upon, one cannot spend this cash that issue. The spending of the money is also done under strict guidelines. Similarly, higher amounts from banks could serve more as a disadvantage rather than an advantage to the company. In addition, the amount that was borrowed was also limited to the borrower's net worthy (Blasi, 2008).
Bond financing involves selling of fixed interest bonds on the market as a way of raising finances for a company. It is important to note that bank finance and bond finance work well hand in hand. In reference to Ghatak (2003), this form of finance has become popular in the recent years, providing a means of insulating the borrower from variations in interest rates (p.382). There are different advantages that are associated with bond finance as a form of external finance. To begin with, bond finance was less costly as compared to bank finance. This is particularly so for established companies with excellent credit rating (Denton Wilde Sapte LLP, 2006, p.126). Similarly, it is important to note that bond finance offered sponsors with a longer maturity period as compared to bank loans, which provide a lower debt repayment. Similarly, the use of bond finance was expected to grow in the market as a result of its ability to provide cushioning investors against variations in interest rates.
Disadvantages of Bond Finance
There are various disadvantages that are associated with bond finance. Firstly, the use of bond financing has developed slowly in some markets across the globe. In reference to Denton Wilde Sapte LLP (2006), this has led to issues such as lack of funding certainty. Similarly, research and studies that have been carried out indicate that once a bond has been issued, the contractual terms and conditions of the bond are, of course, fixed and final in the same way as the terms of a loan agreement are fixed and final once the contract has been duly executed (p.127). Therefore, using bond finance as a option has in some cases been difficult leading to inconveniences.
Leasing could also be used effectively to finance projects that are carried out by firms and organizations across the globe. In this respect, firms can pay for the services of a piece of equipments or machinery. Notably, the use of leasing as external funding had become a common funding strategy for firms and organizations. There are different advantages and disadvantages of leasing as a way of raising finances.
Advantages of Leasing
To begin with, it is important for the management of businesses and organizations across the globe to understand that leasing was cheaper in the short run as opposed to acquiring of new equipments or machinery. Similarly, in cases where equipments wore out more often or there were new technologies that were introduced within a short period of time, leasing was an excellent way of external financing as well as a way of reducing expenses of the firm or organization by a substantial amount. Moreover, regular payments of the lease amount also increased efficiency in the company by enhancing cash flow management.
Disadvantages of Leasing
Whereas leasing was an important source of external finances in the short run, it was an expensive undertaking in the long run. Notably, the company that had leased its equipments or machinery charged some amount of money either per month or per years that would eventually exceed the cost of this equipment or machinery. Therefore, the firm or organization would finally end up paying more for the equipment or machinery.
Having examined different ways of raising cash, it is important to make recommendations on the most appropriate source of external financing alternative for Acme. In this regard, Acme could use a combination of two external financial alternatives to raise money for its overseas production facility. These alternatives are bank loans and leasing. Remarkably, leasing would enable this company to acquire vital equipments that were necessary for it to begin operations. This would be complimented by the bank loan which would help the company to acquire a few equipments and machinery that cannot be leased as well as foot some other expenses that could arise in regard to the operation of this production plant.