Question

Develop a written capital acquisition plan for a minor league sports team. The sports team needs to raise $1,000,000 to pay for stadium renovations. Their seasonal profit is $100,000. What methods could they use to acquire the needed capital? Discuss three methods of raising the necessary funds and the benefits and drawbacks of each.

Answer 1

Capital investments are often needed for growth, acquiring new assets, building new projects, etc. Such capital requirements entails huge sums of money, which are not readily available with organizations. However such capital sums can be acquired from different sources. For the purpose of building the stadium we can consider the following three alternatives, although all of them have their own pros and cons.

1. Traditional sources of funding through banks and financial institutions: This is the most common used source of funding which is easily available. These fund providers have their own set of requirements before any finance can be arranged.

Advantages of this source is that it is easy to avail loans without much difficulty if the financial position of the loan seeking aspirant is good. Some paperwork and formality needs to be done for availing loan. The process is simple without any complexities. On the disadvantages part we can expect provision of some security as collateral deposit for the loan without which the loan may not be granted. Apart from principal an extra burden of interest is also to be borne by the party seeking loan.

2. Self Financing: The promoters or owners of the organization can also arrange the capital from their own pockets. Use of own savings is the easiest way to fund the project. Ensure proper paperwork for repayment of the funds and that’s all.

Advantages of this arrangement is that there is no issue of any paperwork, interest payment and security to be provided. The major disadvantage is that the funds are blocked for a major period of time which otherwise could have been invested somewhere else for monetary gains.

3. Venture capital funding: This is the latest trend in arranging funds for projects around the globe. Venture capitalists are always ready to invest in profitable ventures. They are interested in getting equity or rewards from the organization in return for their capital.

The positive thing is that venture capitalists not only give capital but they also provide widespread publicity for the organization. These investors also provides more business to the firm through themselves and their widespread contacts. On the negative side of Venture capital we have lots of preparation, presentation, paperwork and search for a reliable venture capital fund. These investors also has a big role in decision making process or in other words interference in the business activities.

The above mentioned sources are some of the most used after resources when investment or need for capital arises. The organization should choose wisely from the above alternatives.