There are alternative sources of capital. There are also a number of financing methods that may be employed. Business finance is concerned wit choosing the best source and employing the most effective financing scheme at the least cost possible. There may be a combination of sources, a consortium of lenders, or a combination of financial schemes to get the best terms for the user.

In other words, funds should be obtained at the least cost of capital, with convenient terms of payment and the least burden on the company’s assets. The cost of capital is of prime importance. This refers to the aggregate expenses incurred in obtaining the funds, including but not limited to: interest expense, service charges, selling expenses and underwriting commissions in the case of security issues, anticipated increase in relevant taxes, printing costs of documents and certificates, and legal and government fees.

Procuring sufficient capital is just the means. The end is maximum profit. The cost of capital must be considered relative to the anticipated income from the project.

To illustrate: Aseca Enterprises is engaged in importing chemicals used in preparing animal feeds which it sells to livestock farms and poultry raisers. Their customers obtain the chemical from them themselves and mix them in appropriate quantities.

The owner of Aseca is considering the expansion of his business so they can sell pre-mixed feeds. Estimated expenditures amount to P500,000. Assuming that the cost of capital is 18% per annum (16% on interest and other expenses related to securing the loan and 2% as allowance for anticipated increase in taxes), the anticipated income from the expansion must be substantially higher than 18% per annum for the project to be viable.

When the cost of capital exceeds or is at par with the expected income, the firm may completely abandon the project. Or defer its implantation to a more opportune time, when the cost of capital is less or when expected earnings are higher.

Raising the right amount of capital at the right time and at the least cost to a firm depends primarily on two factors: the build-up of a healthy relationship between the firm and the financial institutions from which it secures capital and the maintenance of the firm’s financial position in tip-top shape. Current and prospective creditors and future investors must be assured that the company can pay its obligations and that it has growth potential.