Andy Rexford has started a cottage industry in his garage for catering for the niche market. Soon that market grows and so does his business. With this fast pace growth in the business Andy has expanded his business from one stitch machine to six stitch machine in the short period of time. Recently, Andy has developed a business plan which clearly states the good future growth and lots of financing required. Andy does not have much money of his own to invest in the business, so he is looking for the external financing sources.
In this report, I will be discussing the different sources of external financing along with their advantages and drawbacks, and then I will be decided which source is the best for the Andy’s business. Sources of financing: There are various sources of financing the business but the most critical aspect is to understand which sources are appropriate for that particular business and how much finances do we needed. The assessment of sources is totally judgmental. Along with the judgment, it is also dependent on how willing he is to share the information about his business and ownership with others.
Sources of finances are divided into 2 broad categories: -Internal financing -External financing. Andy’s savings and income are already been exhausted in the process of growth, and he requires more financing. To help Andy to take the decision wisely I will be discussing few external financing sources. External sources: External financing includes ownership capital and non-ownership capital. These two categories are divided into other several categories. For the business like Andy’s following three non-ownership capital financing is suitable. • Banks • Venture investors • Small business association (SBA)
Banks: They are the financial institution who lends the money to the businesses and individuals and charges an amount of interest against it. They are the hardest place to find the finances as the bank does not grant the loan very easily but the time is been changing now bank has come up many different loan schemes against which people are been given loans. A bank loan is considered as most desired mode of financing. People considered it as the most desirable because it is at times very speedy if you have good credit standing in the market you can get a loan in no time.
Moreover, you can use that money in various ways and accountable for none. Although there are some advantages in getting a loan from the bank but there are some disadvantages as well. Disadvantages like, some loans carry a prepayment plenty so the borrower could not pay the amount early (Scarborough, 2006). Venture investors: Venture investors are those people who wealthy individuals, corporate and formal institutions who are willing to invest in the new business and growing businesses.
In return for providing the capital to the businesses, they usually require a percentage of ownership in the company along with control over the strategic direction and payment assorted fees. “Private equity provides capital and access to a network that can transform a company into an industry player,” Karen E. Klein noted in Business Week. “But the price is high: a chunk of your business. ” Like every other financing source, there are some advantages and disadvantages as well. The main advantage for the start-up business is that they are not obligated to repay the money.
And the involvement of the high profile businessmen can also increase the credibility of new business. The main disadvantage an entrepreneur can have from the venture investor is that they become the part owners of the business, and thus they have the rights have a say in the decisions. The business owner faces a dilution of their position as owners and possible loss of power of controlling the business (Scarborough, 2006). Small business association: Small business association is the organizations in United States formed by the government that helps the entrepreneurs to start up their business.
Small business association acts as the guarantor of loans for the people who do not qualify for the commercial loans. The advantages related to the small business association are that since it’s a government formed organization to encourage the businessman, they are charging very low interest rate as in comparison to the commercial banks. SBA takes a very quick decision regarding the approvals of loans to the people. There are many advantages attached to the SBA that makes it is desirable for the businessman but there is a gloomy side of this loan as well.
Since its government loan no matter what happens to your business you have to pay off this loan before any other debt. Moreover, there is more paper work required than in commercial bank. The government wants to make sure that you are truly eligible for this particular loan or not. Andy’s source of financing: Andy should opt for the bank loan as it suits to the requirements of his business. Future of his business is very bright and there is a guarantee that his business will get double the size within next two years.
So giving the ownership in his business would not be advisable if he wants to have all the profit, and he can have them as the matter of fact. As for the SBA, they have very long repayment schedule though the rate is a low but 20-30 years time period does not worth for that kind of loan. Since Andy only needs $700,000, which can be repaid within 2 years because the annual profit of Andy is 750,000. He can easily pay off this loan with 2 years. Hence it is suitable for Andy to take the bank loan. Conclusion: There are various sources of finances.
Some financing can be done internally while some can be borrowed from others. In the case of Andy his earning is already been consumed in the expansion of the business. So it is suggested to him that he should take the bank loan because he does not need to give the ownership to the venture investors and does not need to give whole life to pay that loan. Bank loan will be the most desirable suggestion as Andy can pay this loan payoff this loan within two years. Moreover, he does not need to give any ownership to anyone.
Courtney from Study Moose
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