Question

Salty Pawz was established using Wanda’s personal funds, since originally she sold her products only to friends and family and was able to pay for everything as she went along. Now that the business is growing, she knows she cannot finance the expansion out of her own pocket, so she is considering taking out a loan. She has no experience with financial institutions other than the basics such as managing her personal bank accounts, a credit card, a mortgage, and a car loan, all of which are with the local Credit Union.

Explain to Wanda how the monetary system works. In particular, describe the various financial institutions she could approach to seek funding.

Explain the financial institutions and markets appropriate for Salty Pawz needs.

Describe available loan options and processes required for Salty Pawz to obtain funds to expand.

Identify your recommendation for the best loan option based on Salty Pawz needs and goals.

Answer 1

The monetary works in the manner that banks and other financial institutions extend credit to businesses or individuals and loan them a sum of money based on their credit report and also the collateral needed by the bank and the ability of the business to arrange such collaterals. The bank charges an interest on the loan that it provides to the business or the individual and that is how the bank is able to make money on the loan. The rate of interest depends on tenure of the loan, credit report and collateral provided.

In this case of a sole proprietorship kind of business, the loan would be granted against a personal guarantee and Wanda can reach out to banks or non-banking financial institutions who specialise in lending to small enterprise for financing the loan.

The appropriate structure of the loan would be long term loan with an interest moratorium in the beginning to ensure that the new business is not burdened with high interest costs. An appropriate source of funds would be specialised financial institutions or banks who have experience in lending to small scale enterprise. Thus she should avoid bigger banks and focus on smaller niche ones.

The various loan options would be:

• 100% funding with fixed interest rate and limited collateral
• Partial funding with fixed interest rate and limited collateral
• 100% funding with variable interest rate and limited collateral
• Partial funding with variable interest rate and limited collateral

The above options may also have a variant of a significant collateral and interest payment moratorium. Based on her needs and her requirements of growing business, she should go for a fixed interest rate and 100% funding with interest moratorium and collateral.

This would ensure that business is not burdened with upfront interest payment obligations and she could also have predictability of interest rate and could negotiate for a lower rate based on collateral being submitted.