Scenario

Posted: November 28th, 2013

Scenario

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Abstract

When looking for money to fund a new business a proprietor is faced with so many queries and doubts concerning the several options available in the market. It is therefore essential for a proprietor to list down all the options and analyze them taking into consideration that the business is new and has no income yet. The proprietor should consider the pros and cons of each form of funding would influence the business. The proprietor should take into account the long and short goals of the business, the market growth, the targeted market, the expansion and growth of the business when considering how to fund the business. In addition, he or she should look for other options that relate to the form of funding that is chosen to compare and contrast.

Scenario

An Investment banker advises a client on any financial transaction that the client wants to undertake. The function of an investment banker is to find potential buyers who want to invest in the securities of that company and transact with the buyers on behalf of the company. The importance of an investor banker is that they are crucial in linking the buyers who want to invest in a company and the company that wants to sell.

The stock market is a public trading platform that sells and buys shares of various companies know as stock for an agreed price. The function of the stock market is to demonstrate how the demand and supply rule results to fluctuation of shares and stock prices. The other function is that it enables interested buyers access the pricing of different stocks from anywhere in the world through online stock reports. Though each country has its own stock market, the overall global stock markets have an effect on the local stock.

Financial management is the capability of a person to plan and control the financial components of a business. These components include procuring, prioritization and using available financial resources to smooth running of an enterprise. The function of financial management is to determine the financial true state of a company. The importance of financial management is to ensure the growth, diversifications and survival of the company through various financial techniques.

Risk financing is minimizing and controlling any potential catastrophic events that may occur in a company and result to a reduced profit turn over. The function of risk management is to expand and create new opportunities for the company. The importance of risk management is that it prepares a company on solving risks that it encounters with time.

The preferred source is borrowing money from a commercial bank or micro finance institution. The reasons for choosing this form of funding are, one the owner of the business retains sole ownership to run the business as they desire and see it fit without any interference from the lender. This ensures that the proprietor develops the unique technology according to the brilliant idea he or she has without pressure to alter it. Secondly, borrowing money requires a proprietor to have a business plan that clearly details how the business is going to run for the loan to be approved. This will ensure that the proprietor who has little financial skills and managerial skills will have a guide to follow, since the bank will advise and make adjustments on the business plan before granting a loan. In addition, to this the proprietor will have financial support through the banks financial advisors and mentors who offer tips on managing finances. The banks offer this support to ensure that the debtors succeed in their business, pay up their principal amount, and interest promptly (Lesko & Martello, 2004). In addition, the success of the business translates to more business opportunity for the bank in the future.

The pros and cons of choosing this form of funding are, one pro is that the interest rate is competitive depending on the market conditions, the proprietors’ credit rating and credit card history. The second pro is that the owner retains sole ownership of the business since the bank expects only the repayment and has no control over the business. The third pro is that the interest payments can be deducted as an expense on the balance sheet before the tax is deducted which ensures that the tax paid is less and saves the business money in the end. The fourth pro is that the proprietor of the business can negotiate for flexible periods and amount of money to be repaid every month depending on the state of the business. The fifth pro is that the money borrowed is utilized properly since a business plan is in place to guide the proprietor on managing the money. In addition, the bank offers advice to the business owners through their staff on ways of improving and managing finances in the business.

One con is that the proprietor would place the business, asset or a personal asset as collateral to guarantee the loan in case the payments are not paid. This may result to the proprietor losing the business or assets to the bank when the business starts at a low pace. The second con is that even when the cash is tight and needed in the business the proprietor has to make monthly repayments to avoid foreclosure. The third con is that the loan may end up expanding the budget expenditure of the business more than the income. This limits the expansion of the business since there is no money to invest back in the business. The fourth con is that the interest rate may be high if the market is unfavorable and inflation is high.

The other option that is possible with this form of funding is borrowing money from friends, spouse, relatives and family. With this funding, the money maybe borrowed and paid back with little or no interest depending on the agreement. This form of funding is convenient since the creditors can understand and extend the period of repayment by explaining the status of the business to them. For some of these lenders, they may require the proprietor to make them partners if he or she does not pay the money as agreed on time. This increases interference from these creditors who are family and friends since they feel that they should offer their advice because they financed the business. This type of funding may create inter personal disagreements between the creditors and the business owner since the creditors may contradict the strategies of the entrepreneur through their interferences. In addition, they may stake a claim when the business starts turning in profits. This complicates the business because the more people who share the profits the less the proprietor gets. Yet the owner requires cash to expand the business to increase the market and grow the business to higher heights.

References

 Lesko, M., & Martello, M. A. (2004). Lesko’s free money for entrepreneurs: How to start or expand a business with government grants, low interest loans, contacts and free services. Kensington, MD: Information USA.