A Variety of Sources of Development Financing for the Company - Essay Example

? Financing Ventures Hannah Porter WGU  Bus. Research and Writing March 25, Table of Contents Executive Summary 3 2. Introduction 4 3. Possible Ways of Financing New Venture 5 3.1 Retained Profit 5 3.2 Financing by Debt 6 3.3 Shares 8 3.4 Private Investors/Angels 8 4. Selecting the Best Source of Financing 9 5. Conclusion 10 6. Recommendations 11 7. Annotated Bibliography 12 Financing Ventures 1. Executive Summary This research paper seeks to provide a detailed analysis of various sources of financing that can be available for a company that is intending to create a presence in a new geographical area. Selecting the best form of financing is critical for the success of any business venture and this should be guided by the amount required. Ideally, this paper recommends that the business should settle on the cheapest and most available form of financing. They should also establish the amount required before settling on a particular source of financing. Moreover, when seeking debt financing the business should ensure that all the paperwork must be made available. These may include the business plan, bank statements, business history and references. Most business start their operations before the owners decide to expand. This can be done by establishing new ventures or expanding. Some of the new ventures that can be explored include developing new product lines, creating and sustaining a presence in a new geographical area and establishing a new market. Each one of the ventures requires funds in order to be successful. The funds that are required by businesses, organizations or enterprises either to start up new ventures or to bolster already existing ventures may be acquired through external sources or internal sources. The sources of capital usually depend on whether the business or organization is at an early stage of rapid expansion. The first source of capital for any corporation is usually the retained profits. The corporation has to approximate the amount of money required. The retained profits are the profits that are kept by the corporation rather than being distributed as dividends to the shareholders. The profits are retained in the organization and invested in new business ventures. A business can choose to opt for debt financing. This form of financing allows the borrower to use the money borrowed for a specified period provided they repay the money with some interest. In most instances, the terms of the loan are usually outlined in the loan agreement. To ensure that the repayment of the loan is guaranteed, the loan may be backed by “collateral” for the sake of a secured loan or “cash flow” for the sake of unsecured loans. A corporation can raise capital through the sale of shares. Essentially, shares relate to public limited companies or private limited companies. “Shares” are self-explanatory and once one buys a shares form a particular company, they in turn own a share of the company. Shares are ideal forms of funding majorly because they are non-redeemable, that is, they form a permanent source of finance and they are usually non-refundable. 2. Introduction Most organizations seek to expand their operations by exploring the prospects of undertaking new ventures. Some of the ventures may include the production of new product line, entry into a new geographical area or the establishment of a new market. With the primary aim of expanding its operations, our firm is intending to create a presence in a new geographical area. For this to happen we will definitely require two considerable sums of money. Some of the notable sources of financing the business may include financing by debt, engaging private investors/angels, selling of shares, early stage venture capital, and expansion stage venture capital (Matthew2011). The companies that are in their early stages may receive their financing from the founders and this may be supplemented by some other financing from friends and family. The founders may also seek financing from other financial institutions but this is usually based on their personal assets and the borrowing capacity of the organization. Ideally, the expansion stage companies have proven revenue flows and a reliable customer base and generally, there are reasons to be convinced that they have the potential of growing rapidly in the near future. In the next stage companies have substantial revenue flows and they seek financing to ensure they expand on their critical mass .Despite the fact that there are various ways of financing the operations of a business, every company has its unique challenges and requirements, and therefore it is very important that the best sources be selected. It is also noteworthy to underline that an organization may use various sources of capital to meet its overall financial needs. The purpose of this research paper is to provide an in-depth analysis of the various sources of financing that is available for a company that is aiming to create a presence in a new geographical area. 3. Possible Ways of Financing the New Venture Identifying the possible means of financing new business operations of ventures is a very crucial and critical aspect for any company or organization. There are various ways and means through which organizations and company’s can finance its venture to establish a presence in a new geographical area. Some of these methods include engaging private investors or angels, financing through debt, sale of the company shares and plaguing back profits (Sherman, 2005). 3.1 Retained Profit In the event that a particular business or an organization decides not to spend its profit such profits are referred to as retained profits. The retained profits are the profits that are kept by the corporation rather than being distributed as dividends to the shareholders. The profits are retained in the organization and invested in new business ventures. Research suggests that this is probably the most common source of financing for various organizations (Archer & D’Ambrosio, 2001). However, mega and bold moves like takeovers or commissioning a robust presence in a new geographical area may require new sources of finance. The retained profits are available for the purchase of new office equipment, vehicles and can be used for expanding the operations of the business. This source of finance is available to companies that have been in business for a long time. The owners can also use the profits accrued from the business for personal use or the profit can be injected back into business. Looking over financial statements, assets and liabilities can determine what type of financing may be needed. It is always the prerogative of the business owner to decide whether to plough back the profits or to use them to achieve personal objectives. This form of business financing is very common at the early stages of a particular venture (Dermot, 2003). This form of finance shows much advantage because the corporation does not have to seek finance from outside sources. There are no interest payments attached to this form of finance. The organization does not have to reveal its business plans to the financing institutions such as banks in order to acquire the relevant financing. Nevertheless, retained profits represent dividends foregone to the owners of the corporation. Owners can then demand regular dividends from the corporation (Archer & D’Ambrosio, 2001). Owners may wish to take advantage of these advantages and obtain copies of financial statements that will reveal facts on whether or not the company has the advantages available. 3.2 Financing by Debt Companies or organizations may also resort to financing their operations by way of debt. Dept denotes shorter or long-term credit and the potential lenders may include financial institution, venture capitalists or banks. The form of financing allows the borrower to use the money borrowed for a specified period provided they repay the money with some interest. In most instances, the terms of the loan are usually outlined in the loan agreement. To ensure that the repayment of the loan is guaranteed, the loan may be backed by “collateral” for the sake of a secured loan or “cash flow” for the sake of unsecured loans. Accordingly, an unsecured loan is provided when there is an assurance from the borrowers that the cash flow will be able to pay for the interests and the required premiums. A marketable asset usually guarantees a secured loan, hence collateral (Dermot, 2003). Financing business operations by dept is often very difficult for early stage companies or businesses because of the high risks involved. Moreover, they may lack tangible assets that can be used as collateral. As the business progresses, it is often very easy to explore financial instruments that posses considerable debt components. Bank loans and other forms of debt finances are very crucial forms of capital but they have to be paid back with some interest. Loans may appear to be very easy forms of financing ventures, however, the costs associated with servicing the loans may be very high. The interest rates are usually flexible and they may rise, hence this aspect must be captured clearly in the planning stage before the loan is taken (McMillan, 2006). Advantages of debt financing allows an organization or business to have control over its own destiny, that is, there are no investors or partners to answer to and the organizations makes all the decisions. The interest paid on the loan is tax deductable hence; it shields part on the business from income taxes and thus lowering the tax liability of the organization. Debt financing will change the income statements and show that the company has an increase in liabilities. 3.3 Shares Shares also form a very critical form or method of financing the operations of a business. Essentially, shares relate to public limited companies or private limited companies. “Shares” are self-explanatory and once one buys a shares form a particular company, they in turn own a share of the company. Shares are ideal forms of funding majorly because they are non-redeemable, that is, they form a permanent source of finance and they are usually non-refundable (McMillan, 2006). Equity holders are the owners of the company and they earn dividends whenever the company makes profits. The corporation or company will also not be compelled to pay interest or repay the finances as it is with other forms of finance such as bank overdraft or loans. The main disadvantage that may come with raising finances through the sale of shares is mainly that the original owners of a particular business must contend with the reality that other individuals may own part of the company. Moreover, they may lose control of the affairs of the company as the shareholders are entitled to provide views on how they think the company should be run (Porter, 1992). The main advantage of shares as a source of business finance is that they are non-redeemable, that is, it is a permanent source of finance and does not need to be refunded. One must remember that shares provide an ownership to the company and many times the shareholders will have a say in the company. 3.4 Private investors/angels Business angels are wealthy individuals who invest huge sums of money to various companies and organizations. In most instances, they like to work hand on, that is they may come in as directors of the companies. It is very difficult to find business angels as they rarely advertise or market themselves. Nevertheless, they can be located through extensive networking within business circles (Lerner, 1998). In order for our company to get in touch with various business angels there is dire need for the management to engage in through and extensive networking. This networking will entail an exhaustive search for angel investors. The advantage of business angels is they are prone to making investment decisions very quickly without very lengthy and complex assessments. A considerable number of business angels can bring integral firsthand experience of their working in small business or running their own business ventures. Angels are usually very ready and willing to trade and put their money in ventures that most financial institutions regard as high risk. They invest for longer periods as compared to other investors, that is, they may invest their money for up to five years or more. However, they invest smaller sums of money, which may range between $1 or less (Brealey, et al., 2003). 4. Selecting the Best Source of Financing Selecting the best source of financing is not an easy task for any organization or company and a business needs to conduct a very comprehensive assessment on the various types of finance options before it settles on a particular one. Determining which financing will be the best for the company requires reviewing the current financial statements. Some of the issues that have to be assessed include the possibility of the required finance being raised from internal sources or will new finance have to be mobilized from outside sources; in the event that finance needs to be raised externally, should it be equity or debt. This will be determined by projecting the company’s future revenues. If external sources of finance are to be used, it is important to examine where it should be raised from and in which form. Indeed, before selecting the appropriate source of finance it s very important for a company to identity the amount of money required for the proposed venture (McMillan, 2006). This is very important because large amounts of money may not be available through some sources while other financial sources may not be flexible enough to offer smaller amounts of finances. The company should also consider the cheapest option of obtaining finance. Normally, the cost of finance is usually gauged in terms of the extra sums of money required to secure the initial amounts. This is usually reflected on the interest that is to be paid on the amount borrowed. There is no doubt that the cheapest form of finance is injecting profits back into the business (Sherman, 2005). 5. Conclusion In conclusion, businesses need sources of financing whether in their early stages or in the expansion stages. After operating for some time, a company may decide to embark of various expansion ventures. There is no doubt that all these ventures require funds to be successful. The funds that are required by businesses, organizations or enterprises either to start up new ventures or to bolster already existing ventures may be acquired through external sources or internal sources. Research suggests that there are several sources of financing that a company or organization can use these may include the use of retained profit, financing by debt, engaging private investors/angels and selling of shares. Despite the fact that there are various sources of business financing, every company has its unique challenges and requirements, therefore, it is very important that the best sources be selected. Before embarking on an ideal financing method a corporation should determine the amount of finance needed. This is found by assessing financial statements and future projections. The amount of finance needed in the best determinant of the source of financing. When the amount needed is very small, and then the financing can be achieved through internal borrowing or through getting some of the customers to pay up. When the amounts needed are very large, the business can resort to other sources of financing with the potential of offering huge sums of money. It is important to examine what the money is needed for before embarking of the suitable form of financing. It should also be noted that no matter which form of financing is selected or preferred, there is need for careful panning in order to secure it. The corporation should assess its financial needs and come up with estimates of the total finances that must be obtained either through outside or internal sources. Again, this comes from reviewing financial statements. Overall it is very difficult to recommend the ideal form of capital for financing a particular project or venture. Recommendations Determine the business’s personal credit score before seeking debt financing The first source of business financing should always be retained profit When long term financing is being sought it is very appropriate to settle on dept financing or share capital Retained profits should be avoided if a large sum of money is required Annotated Bibliography Andrews, Edmund L (2004). Investing in Entrepreneurs, Venture. Oxford : Oxford University Press. This article gives a closer look at what investors are looking for when it comes to providing financing. The entrepreneur is the one responsible to provide everything that the investor needs. This book gave a huge piece of information for the research. This seems to be a reliable source. Sherman, A (2005). Raising Capital: Get the Money You Need to Grow Your Business. New York: AMACOM. Sherman in his book provides a critical analysis of the various methods of raising capital for expanding businesses or starting new business ventures. This book is a great book for any entrepreneur and has much insight in the topic of capital funding. The source is reliable since the author is in the business field. Archer, S.H., & D’Ambrosio (2001).The Theory of Business Finance, Collier MacMillian New York. This book provides a comprehensive analysis of the theory of business financing. Moreover, it provides an in-depth analysis of various sources of business finance. The use of the information regarding business theory was beneficial to the research paper and came from a credible source. Bartlett, J.W., 1995, Equity finance: Venture capital, buyouts, debentures, debt financing. New York: John Wiley. Bartlett outlines the major sources of business finance that can be accessed by individuals and businesses seeking to diversify and expand their operations. Buyouts, and debt financing are the main areas of focus and provided a great deal of research about business financing. The source is very credible since Bartlett is a known business capitalist. Brealey Richard A., Myers Stewart C., and Markus Alan J., (2003).Fundamentals of Corporate Finance, McGraw. Hill Inc, New York. This book lays special emphasis on the various aspects that should be considered before seeking business finance. This credible source comes from a text book and outlines the basics of corporate finance. The book is essential to researching corporate finance. Dermot Berkery (2003). Raising Venture Capital for the Serious Entrepreneur. Havard : Harvard University Press. This book outlines the avenues of raising venture for new business ventures. The main sources that have been outlined include debt financing, retained profits, and debentures. Special interest focuses on financing through debt and how it can be beneficial. The source is reliable and comes from the well known Harvard University Press. Lerner, J., 1998, Angel financing and public policy: An overview, Journal of Banking and Finance 22, 773-783. This article contributes to research regarding angel investors. Angel investors are individuals who invest their money in businesses. This book attempts to demystify the concept of angel financing. It provides clear guidelines on how angel financers operate and where they are most likely to be found. The Journal of Banking Finance is a credible source and the article a noteworthy author. McMillan, J (2006) Basics of Business Finance. Cambridge: Cambridge University Press. In this book, Macmillan provides an introduction into the intricacies and basic concepts about business financing. He further elaborates on the various forms of business financing and details on the advantages and disadvantages of all of them. Obtained from the Cambridge University Press, the article contained information that was credible and in line with research regarding business finance. Porter, M., 1992, Capital choices: Changing the way America invests in industry. Washington: Council on Competitiveness. The book describes what is necessary when undertaking investments. Different organizations require different capital sources. This book provides an informative analysis of the various capital choices that may be available for investors. The book also provides insights into the methods of financing that are mainly used within the American market. Porter, a council member ensures a credible source. Read More