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The financing sources of multinational firms should utilize mixed sources of financing so as to leverage the risks associated with independent sources. This means that the firm should adopt different sources so as to meet different financial needs of its subsidiaries. The assumptions made are that the multinationals are able to access both local and foreign sources of finance and that they have full information of the prevailing market conditions and stocks exchanges of several countries of operation. The recommendations of sources of financing are explained in the following information.
The first recommendation and the cheapest source of financing is the utilization of the retained earnings by the multinational firm. With the use of this source of financing, the firm will not incur any costs of sourcing the finances. The shareholders approval will only be sought by the managements. Since, the money is not borrowed there will be no interest and thus remain to be favourable (Moynihan & Titley 2000, p. 334). The assumption that we make here is that the multinationals are likely to be making enough profits to be able to retain a portion of the same.
The other option of raising finances is by selling off unwanted assets. This is where the company no longer requires some certain assets in particular subsidiaries. This means that these assets like old computers or available space are disposed off and the realised amounts invested in the company (Moynihan & Titley 2000, p. 334). The assumption is that the disposed assets will fetch good amounts capable to be reinvested in various firm’s operations.
The multinational firms would also source its financing from within its chain of subsidiaries. This means that the established subsidiaries would bring in part of their savings and accumulate to finance a new establishment. The amounts may be refunded to the respective sources once the subsidiary returns profitability status. This is a kind of lending where there is no cost associated with the interest but utilization of multinational savings (Moynihan & Titley 2000, p. 334). This is an internal source with the assumption that the other subsidiaries have enough saved funds to support the new establishment.
The other source of financing available is the use of bank overdrafts. These are agreements made with banks to allow payments when beyond the available funds in the bank. The arrangement is usually made to meet unexpected payments of bills. These overdrafts are usually repaid off immediately the money is deposited into the bank account. This is an expensive financing because interest is charged on the daily basis of standing overdraft (Moynihan & Titley 2000, p. 334). The assumption is that the commercial banks have agreed with the multinational firm on the concept of overdraft on their bank accounts.
Moreover, the other reliable source to be used by the multinational firm is the bank loans. Given the fact that the company is multinational in nature, it would have developed good confidence among the commercial banks. The firm would utilize this financing option to purchase equipments and other small items. The loan amount is usually paid over an agreed duration of time with specified interest rates charged. The multinational is in a position to acquire multiple loans at different countries of existence and service them at respective countries. This method is usually a very good way of raising operating funds for multinationals. However, loans are charged interest making them rather expensive source (Moynihan & Titley 2000, p. 334). The assumption in this case is that the commercial banks have confidence in the multinational firm ability to repay all its advanced loans.
In addition, leasing is another available source of financing to the multinational firms who do not want to spend a lot of money at a go. This is where the firm pays rent for the use of equipments or machinery over a fixed period of time. At the end of the fixed period, the ownership of the said equipment reverts to its owner. The multinational firm will be maintaining and servicing the equipment and machinery during the entire time of the lease (Moynihan & Titley 2000, p. 335). The assumption is that the firm will be in a position to find landlords who will be willing to lease their properties at respective countries of operation.
Furthermore, the multinationals are able to utilize trade credit from suppliers who allow them to make payments later. This means that the credit period can be agreed from one up to three months. With this arrangement, the company will have equivalently obtained interest free loan amounting to the value of supplies on credit. Since most multinationals have big operations and brand names, the suppliers trust them in supplying their goods at a credit over given periods (Moynihan & Titley 2000, p. 335). The assumption is that the suppliers will have confidence to supply products on credit to multinationals.
The other recommended source of financing is the venture capital for starting up new subsidiaries of the multinational firm. This financing is obtained from specialist venture capital firms which concentrate in loans to new and risk businesses who may not be in a position to raise enough capital for new start ups. These ventures usually may end at an agreed period where the venturing partner may sell its part of shareholding entirely to the multinational company one the subsidiary is in a position to provide its working capital without venture support (Moynihan & Titley 2000, p. 335).
The other source of financing is through government assistance. This is a situation where the multinationals partner with various governments at their countries of operation so as to develop the best possible human capital. For instance, the government of UK offers free advice as well as assistance through grants, loans as well as training for the firms (Moynihan & Titley 2000, p. 335). The government will benefit in having its citizens employed in the multinationals whereas the firms will have benefited from the governments financings which could have otherwise be very expensive. Thus the multinationals should form more partnerships with governments to benefit from the financings.
To add to the recommended sources of financing is the selling of shares by the private or public multinationals. The private firms may sell shares to friends, relatives, employees or other persons known by the owners. However, public firms can sell their shares to the general public. This can happen in the local or foreign stock exchanges that will raise maximum share value to the company. A share is a document entitling the holder part of the company ownership. The price paid for the share is printed on the face of the certificate (Moynihan & Titley 2000, p. 336). At the stock exchange there is trading on the same shares to different persons which subsequently change the firm’s ownership structure with every sale giving the investors the capital gains. Thus the firm will only raise directly the initial offer price or through rights issues later. The assumption is that there will be purchase of the shares sold by the multinational firm.
The financing is important in ensuring competitive performance of any business either being multinational or locally based. Thus the decisions of the financing sources for any multinational firm should ensure proper balancing so as to keep the overall finance costs as low as possible for the company. The importance of having low financing costs is that it results in higher profit retentions which maximize shareholders wealth which is the main goal of the operations of several firms. Therefore we conclude that the choice of financing source should be given due importance by multinational organizations.