Question

Please no handwritten or copied answers. Thanks.

Objective: Make proper decisions based on short and long-term decision analysis

Introduction: When designing your business plan, you may consider different sources of funding – debt or equity, short-term or long-term. There are pros, cons, and risks of each source of funding to consider. A key component of business planning requires identification for possible sources of funding for your business plan and their associated costs

Deliverables: Written Assignment-3 full pages (exclusive of title and reference pages) applying APA formatting that will consider the following scenario:

Activity Details

Perform the following steps:

Step 1: Begin with an introductory paragraph that describes what a business plan is and why it important for every business to have one.

Step 2: Research and Write Essay Content

Research and review from the course readings and external sources.

Explain the pros and cons, advantages and disadvantages, and risk factors of financing your business to include:

• Debt (borrowing the money from banks, friends, and family)
• Equity (sharing ownership with private and/or public investors, as with stock offerings)
• Costs associated with your possible sources
• Risks associated with your possible sources

Step 3: Conclusion Summary

For the conclusion paragraph summarize what you have learned about possible business funding sources. State your preference of financing (Debt, Equity, or combination thereof) if you were to start or extend a business venture.

Answer 1

Business Plan and its importance

Business is not just a function of various variables. It involves anticipating various scenarios, actions to deal with them which necessarily involves strategizing and planning so as to make any idea turn into successful business. Business plan is a set of predefined policies, procedures and actions to be followed in business. Business plan cannot be setup in an isolation. It has to be modified and adapted as per the changes occurring in Business Environment.

Business Plan is of very high significance since it has got everything to decide regarding Growth and Profitability of Business. It will define whether the business will be able to achieve its defined goals in Future or not. An ever evolving plan ensures that business is constantly adapting to changes in environment and achieving its goals.

Business Sources of Funding

No business can work without adequate funds. There are various sources by way a business can arrange funds:-

Debt:- Debt refers to the money which has been borrowed by external sources outside the entity. There is a contractual obligation to repay the funds at stipulated time period. Debt is further classified into Long Term(Repayable beyond 12 Months) and Short Term(Repayable within 12 Months). Debts can be arranged from Banks, Financial Institutions, Friends or Families.

Advantages of Debt

• Control: Taking out a loan is temporary. The relationship ends when the debt is repaid. The lender does not have any say in how the owner runs his business.
• Taxes: Loan interest is tax deductible, whereas dividends paid to shareholders are not.
• Predictability: Principal and interest payments are stated in advance, so it is easier to work these into the company's cash flow. Loans can be short, medium or long term.

Disadvantages of Debt

• Qualification: The company and the owner must have acceptable credit ratings to qualify.
• Fixed payments: Principal and interest payments must be made on specified dates without fail. Businesses that have unpredictable cash flows might have difficulties making loan payments. Declines in sales can create serious problems in meeting loan payment dates.
• Cash flow: Taking on too much debt makes the business more likely to have problems meeting loan payments if cash flow declines. Investors will also see the company as a higher risk and be reluctant to make additional equity investments.
• Collateral: Lenders will typically demand that certain assets of the company be held as collateral, and the owner is often required to guarantee the loan personally.

Equity Financing

With equity money from investors, the owner is relieved of the pressure to meet the deadlines of fixed loan payments. However, he does have to give up some control of his business and often has to consult with the investors when making major decisions.

Advantages of Equity

• Less risk: You have less risk with equity financing because you don't have any fixed monthly loan payments to make. This can be particularly helpful with startup businesses that may not have positive cash flows during the early months.
• Credit problems: If you have credit problems, equity financing may be the only choice for funds to finance growth. Even if debt financing is offered, the interest rate may be too high and the payments too steep to be acceptable.
• Cash flow: Equity financing does not take funds out of the business. Debt loan repayments take funds out of the company's cash flow, reducing the money needed to finance growth.
• Long-term planning: Equity investors do not expect to receive an immediate return on their investment. They have a long-term view and also face the possibility of losing their money if the business fails.

Disadvantages of Equity

• Cost: Equity investors expect to receive a return on their money. The business owner must be willing to share some of the company's profit with his equity partners. The amount of money paid to the partners could be higher than the interest rates on debt financing.
• Loss of Control: The owner has to give up some control of his company when he takes on additional investors. Equity partners want to have a voice in making the decisions of the business, especially the big decisions.
• Potential for Conflict: All the partners will not always agree when making decisions. These conflicts can erupt from different visions for the company and disagreements on management styles. An owner must be willing to deal with these differences of opinions.

Conclusion

When looking for funds to finance the business, an owner has to carefully consider the advantages and disadvantages of taking out loans or seeking additional investors. The decision involves weighing and prioritizing numerous factors to decide which method will be most beneficial.