Financial Analysis: A Controller’s Guide, Second Edition

Chapter 4. Evaluating Financing Options

In a larger corporation, the choice of how to fund the purchase of assets falls on the chief financial officer (CFO). However, there is generally no CFO in a smaller organization, so this task falls on the controller. Also, the funding for smaller purchases, even in a larger company, will frequently be left up to the controller to decide. To assist the controller in making the correct determination of which types of financing options to select under different circumstances, this chapter includes discussions of the types of funding options available, as well as all related cost, risk, and control issues. This chapter is intended to give a controller a sufficient amount of information to properly select the correct financing option that matches a company’s specific circumstances.

Types of Funding Options

There are two types of funding options: (1) debt and (2) equity. Later sections of this chapter will discuss a number of variations and crossover instruments, but essentially, every type of funding choice is based on one of these two options. In the case of debt, the funding is contingent on some obligation to pay interest in exchange for the use of the invested funds, which are also to be returned at the end of a stipulated period. The most pure version of debt is the long-term loan, which is usually collateralized against some group of company assets, carries a stated interest rate that may move with an underlying interest rate or pricing indicator, ...