Question

Suppose you need $1 million dollars to start your dream business. Describe two ways you would generate the funds needed to start such a business. Next, discuss any risks or benefits you should be aware of when gathering these funds. Provide examples to support your response.

Answer 1

For gathering funds there are genrally two ways suitable for financing -

Equity financing

it involves selling a portion of a company's equity in return for capital. For example, the owner of Company might need to raise capital to fund business expansion. The owner decides to give up 10% of ownership in the company and sell it to an investor in return for capital. That investor now owns 10% of the company and has a voice in all business decisions going forward.

Debt Financing

Debt financing involves the borrowing of money and paying it back with interest. The most common form of debt financing is a loan. Debt financing sometimes comes with restrictions on the company's activities that may prevent it from taking advantage of opportunities outside the realm of its core business. Creditors look favorably upon a relatively low debt-to-equity ratio, which benefits the company if it needs to access additional debt financing in the future.

RISK ASSSOCIATED -

EQUITY FINANCING

In order to gain funding, you will have to give the investor a percentage of your company. You will have to share your profits and consult with your new partners any time you make decisions affecting the company. The only way to remove investors is to buy them out, but that will likely be more expensive than the money they originally gave you.

DEBT FINANCING

What if your company hits hard times or the economy, once again, experiences a meltdown? What if your business does not grow as fast or as well as you expected? Debt is an expense and you have to pay expenses on a regular schedule. This could put a damper on your company's ability to grow.

BENEFITS

EQUITY FINANCING

• The main advantage of equity financing is that there is no obligation to repay the money acquired through it.
• Equity financing places no additional financial burden on the company,

DEBT FINANCING

• The main advantage of debt financing is that a business owner does not give up any control of the business as they do with equity financing.
  • Creditors look favorably upon a relatively low debt-to-equity ratio, which benefits the company if it needs to access additional debt financing in the future.