Important Points - Creditors Finances
When by using creditor's finances a company must consider:
1. That cost of finance is less than the Return that implies the rate should not be less than the bank interest + inflation + risk.
2. Economic situation prevailing - need debt under boom situation.
3. Present gearing - whether high this will lead to:
4. Low credit rating
5. Lowering of the company's share prices particularly to less than Par value - this leads to mass sale of shares - producers rush to draw their finances and hence receivership.
6. Long term ventures have to identify for independent feasibility studies before funds are committed.
7. Assessment of the return - at least should be better than minimum return + risk + inflation.
8. Economic life - whether uncertain, the return ought to be higher. That life must permit the company to pay off the loan.
The financial manager must be guided through principles of financial prudence i.e.
1. He has to consult experts.
2. He has to include investment committee
3. He has to ascertain where everyone included in the implementation of the venture has not been left out either within the implementation phase or planning phase.