1. Shalini should not choose ‘debt’ as a source of finance for financing the modernisation and expansion of her business. The main reason for our suggestion is that the cash flow position of the firm is weak and as a result, the firm may not be able to honour fixed cash payment obligations.
2. Following are the other factors which Shalini should keep in mind while taking the decision relating to source of finance :
1. Conditions of capital market – The time of issue and the composition of the buyers should be kept in mind. If capital market is depressed i.e., investors are not willing to subscribe to shares, a company should rely on debt as a source of finance.
2. Desire to control – Desire of the promoters to have control over the company is an important factor. If the promoters want to retain control, they will issue more debentures and preference shares and less equity shares.
3. Regulatory framework – The management of a company should consider regulatory framework provided by Companies Act, SEBI Guidelines, etc. Raising funds from banks and financial institutions require fulfilment of some norms.