The cheapest source of finance is (2024)

FAQs

The cheapest source of finance is? ›

Retained earning is the cheapest source of finance.

Since Debt is almost always cheaper than Equity, Debt is almost always the answer. Debt is cheaper than Equity because interest paid on Debt is tax-deductible, and lenders' expected returns are lower than those of equity investors (shareholders). The risk and potential returns of Debt are both lower.

Retained earning is considered as internal source of long-term financing and it is a part of shareholders equity. Generally, retained earning is considered as cost free source of financing. It is because neither dividend nor interest is payable on retained profit.

Debentures are a cheaper source of finance in a company. A debenture is a debt instrument that is issued by a company to raise money to facilitate the operations of the company. A denture is not secured by any collateral and a debenture holder is paid back interest at a fixed rate for a specific period.

As interest expenses are removed, the company needs to pay more taxes. That's why debenture financing is considered a cheaper external financing source. Also, in debenture financing, the company doesn't need to let go of ownership of the company.

Depending on your business and how well it performs, debt can be cheaper than equity, but the opposite is also true. If your business turns no profit and you close, then, in essence, your equity financing costs you nothing.

d The cheapest source of finance is retained earnings. Retained income refers to that portion of net income or profits of an organisation that it retains after paying off dividends.

Debt is generally the least expensive source of capital.

They are inexpensive/cheap (not free): The cost of capital of retained profits is the opportunity cost for the shareholders to leave profits in the business (like they could get a return by leaving it in the business).

Which is the most expensive source of funds? ›

Preference Share is the Costliest Long - term Source of Finance. The costliest long term source of finance is Preference share capital or preferred stock capital. It is the source of the finance.

A source or sources of finance, refer to where a business gets money from to fund their business activities. A business can gain finance from either internal or external sources.

Equity is the riskless source of finance, as there is no obligation on the company to pay dividends or repay the capital of the shareholders, whether they earn a profit or not.

Retained earning is the cheapest source of finance. Q.

The firm gets an income tax benefit on the interest component that is paid to lender. Therefore, the net taxable income of the company is reduced to the extent of the interest paid. All other sources do not provide any such benefit and hence,it is considered as a cheaper source of finance.

Typically, the cost of equity exceeds the cost of debt. The risk to shareholders is greater than to lenders since payment on a debt is required by law regardless of a company's profit margins.

Debt financing may have more long-term financial benefits than equity financing. With equity financing, investors will be entitled to profits, and if you sell the company, they'll get some of the proceeds too. This reduces the amount of money you could earn by owning the company outright.

Because equity financing is a greater risk to the investor than debt financing is to the lender, debt financing is often less costly than equity financing. The main disadvantage of debt financing is that interest must be paid to lenders, which means that the amount paid will exceed the amount borrowed.

Debt financing refers to taking out a conventional loan through a traditional lender like a bank. Equity financing involves securing capital in exchange for a percentage of ownership in the business.