Question

A rapidly growing small firm does not have access to sufficient external financing to accommodate its planned growth. Discuss what alternatives the company can consider in order to implement its growth strategy. How can the firm determine the cost of those alternative sources of capital?

Answer 1

Smaller companies that are rapidly growing, can raise funds from these alternatives:

Bank Loan- They can take loan from bank, banks charge interest on the loan, bank loan is not easily available for start up companies as banks see the past history of the company but still it can be provided by showing the legal documents of the company and growth potential in the future.

Small business investment centers- These are licensed financial institutions and regulated by "Small business Administration". These provide funds to small business and start up companies.

Investment banking- Investment bankers issue the small companies' shares to the public and public gives money to the company and in return, it gets shares of the company. This option is available for smaller companies that have good growth in past years.

Loan from family and friends- Smaller companies can take loan from their family members and friends in small amount.

Companies can meet their funds needs from above alternatives, they can determine the cost of capital by knowing the rate of interest or cost of fund for a particular alternative, if company goes for two alternatives, it can provide the weight to the capital can calculate its weighted average cost of capital (WACC) to know the average cost of capital so that it can target its required rate of return higher than WACC.