Question

You are about to start a new business and are eager to secure the financing needed for it. Research financing options available and explain the pros and cons of each option and your recommendation. Be sure to justify your choice.

Answer 1

The two options that are available to obtain the necessary funding for the business are equity financing and debt financing.In equity financing the firm raises funds needed for it's operation and expansion by selling shares.The investors who purchase these shares become owners of the company.As a result there will be a dilution of ownership.The firm is not required to payback the investment made by the investor and thereby lowers any pressure on the firm's revenue generation.But in equity financing the investors are owner of the company and will have a say in the decision made by the firm and the strategies that it wishes to implement.

When it comes to debt financing the firm will be legally mandated to make interest payments on the amount borrowed.on top of that the assets of the firm will be used as collateral to obtain funding.the main disadvantage associated with debt funding is the mandatory interest payment which will put the firm under pressure if the firm falls on tougher time and struggles to generate revenue.the main advantage of debt financing is that there is no dilution of ownership.As a result the lenders will have no control over the day to day running of the company which is present in equity financing.

The easiest source of securing financing is the debt financing method.But it comes with it's flaws as mentioned above.The best way would be the ideal combination of debt and equity financing.As the firm grows beyond the initial stages the firm can then resort to mezzanine financing which combines the features of debt and equity financing and gives lender the right to convert the loan provided to equity in the event of a default.