This assignment utilizes a case of your choosing depicting an entrepreneurial venture. This involves conducting research on the venture.
Conduct research, and select an entrepreneurial venture that is less than two years old, or you could use your own idea for starting an entrepreneurial venture. Select either debt funding or equity funding for this venture.
Remember to include theoretical concepts, practical entrepreneurial thinking, and supporting research. Begin with a brief description of this venture and then respond to the following topics.
Explain the rationale for why you selected either debt or equity funding. Be sure to include the difference between debt and equity funding.
Describe how you would accomplish this funding. What actions would you need to take to be successful in acquiring this funding?
What pre-planning activities would you need to accomplish to achieve your desired outcome of receiving cash to support this venture?
Explain the financial consequences of not following the pre-planning activities.
Kinley Greens Limited is a startup business that will be run by two managers. During its first phase of operation, the company will utilize debt funding as the key financier for its growth and development. Debt funding is obtained at a slightly lower cost compared to equity funding. Given the nature of the business, sourcing capital on a debt basis will help the company establish a sustainable growth metric with minimal risks. The capital investors do not have equity in the business as they are only charged principal interests without any additional charges. Debt financing requires the owner to give up certain percentage equity for the lender to for out cash or capital. Initially, the plan is to source funds from individual firms that have flexible and affordable interest rates. Later on, when the business grows, the company will source from large private firms to obtain the capital needed to expand its operations. The company will also consider the repayment policies and plans to ensure its cash flow is sufficient to meet its obligations. To ensure the funding is successful, the investor should ensure that all the financial records and repayment terms are policies show a positive credit score. This demonstrates the willingness of both parties to honor the terms and guidelines presented by the lenders. Secondly, the business should ensure that it has adequate cash and collateral to secure the loan if the business venture fails.
Kinsley Greens Limited will be a sole proprietorship managed and run by two managers. It will be a startup business. The business will place reliable and efficient entry growth strategies such as using the latest technology, hiring skilled staff, segmenting the market, and advertising to create a firm foundation. The proposed enterprise will utilize debt funding as the key financier for the enterprise’s growth and development.
Kinsley Greens Limited is a new firm gaining foot in the market. The business should raise its capital through debt funding. Debt funding is obtained at a slightly lower cost compared to equity funding. Given the company’s nature, sourcing capital on a debt basis will help the business establish a sustainable growth metric with minimal risks. The capital investors do not have equity in the company as they are only charged principal interests without any additional charges. With equity financing, the business owner has to give up a certain percentage of their company’s stake for an investor to fork out capital. Although in debt funding, the company can release specific machinery tools as security for the business owner. With debt funding, there is no continuous change of power; the current management can run the business to make necessary decisions. Management decisions are solely the decision of the leaders from the earlier stages. With debt funding, the managers do not need to seek approval from a third party while hiring new personnel, selecting vendors etc. However, with equity funding, the lender has a voice in the business’s leadership and management. The lenders mostly analyze the financial statements to ascertain the investor’s potential to abide by the stated financial repayment plan (Killaly, 2017).
Another significant benefit of debt funding is that it is accessible and available to small businesses of any size. This is because most venture capitalists seek companies with high-profit margins and the potential to grow in a short period, and that eliminates a majority of small businesses. Also, debt funding allows the company to take small, easily repayable loans; thus, building a positive credit history boosts its profile and elevates the business credit score. A favorable business credit score shows that your business has a positive cash flow and can easily honor the payment agreements. Through this, Kinsley Greens Limited will have access to immense financial opportunities to help the business grow from the ground up. On the other hand, debt funding accrues several drawbacks. The lending environment is harsh and unfavorable for startups. As a result, startups can accrue massive debt if the business fails to pick. Furthermore, your assets may also be at risk if you put up collateral, a personal guarantee to repay the loan or have a blanket lien attached to your loan.
Initially, the plan is to source funds from individual firms that have flexible and affordable interest rates. Later on, when the business grows, the company will source from large private firms to obtain the capital needed to expand its operations. The company will also consider the repayment policies and plans to ensure the cash flow is and shows a positive trajectory. The first course of action is to showcase responsible creditworthiness. Although it is a startup business, Kinsley Greens Limited must showcase a financing contract and records of a transaction between the vendors and lenders from the first point of contact (Hanssen, Deloof, & Vanacker, 2016). Lenders also look at your professional or personal references, income source, personal/ business credit history to determine your eligibility for the capital and resources.
To ensure the debt funding process is successful, the investor should ensure that all the financial records and repayment terms are policies show a positive credit score. This demonstrates the willingness of both parties to honor the terms and guidelines presented by the lenders. Secondly, the business should ensure that it has adequate cash and collateral to guarantee to secure the loan if the business venture fails. It is also ideal for strategizing on the period, time and terms necessary for the planning period to ensure that the period and terms allow the business to grow. Furthermore, it is of paramount importance for Kinsley Greens Limited to prepare a financial contract that allows flexible rates and deductions to guide the managers throughout the process.
Lack of a financial plan or a rigid framework at the beginning of the business sets up the company for failure. There must be numerous steps to guide the sourcing process and the allocation, such as duration, period, amount, interest rates and credit rating. This is because sourcing is a financial burden to a startup business. A company needs to have a financial back up to create a favorable path for growth and investment. An excellent financial roadmap allows the startup business to balance spending to ensure the company can fulfill its financial obligations in time.
Furthermore failure to outline a debt funding strategy can lead to bankruptcy, leading to the collapse or failure of the business. Therefore, it is the company’s sole obligation to adhere to the rules and regulations enacted at the beginning of the lending process to ensure the business’s growth and development. Lack of a lending plan can also cause a company to accumulate high-interest rates. Although it may seem trivial to keep borrowing loans when a company is undergoing a tough time, without a rigid plan, the interests can accumulate due to the varying macro and microeconomic conditions (Brogi, & Lagasio 2017). Following this, the company will face high-interest rates, which pose a considerable burden for the business. To minimize these risks, it is essential to establish strategies at the beginning of the project to ensure that all the financial operations are recorded. The business can account for the negative or positive cash flow. Through this company can demonstrate its ability to fulfil its obligations to the lender in due time. The rate of borrowing should be determined by the success and growth metric of the business. If the company can raise high profits in its first phase of operations, the entrepreneur should slow down the borrowing rate. Although the business will flourish at a relatively slow rate, the business will balance and establish a healthy and positive credit history whereby the company pays all the debts in time.
Brogi, M., & Lagasio, V. (2017). SME Sources of Funding: More Capital or More Debt to Sustain Growth? An Empirical Analysis. Access to Bank Credit and SME Financing (pp. 173-199). Palgrave Macmillan, Cham.
Hanssens, J., Deloof, M., & Vanacker, T. (2016). The evolution of debt policies: New evidence from business startups. Journal of Banking & Finance, 65, 120-133.
Killaly, J. (2017). The competitive market system for debt and equity funding. Journal of Australian Taxation, 19(3), 60.