Question

Jake Blake is an entrepreneur and owner of Wood Creations a sole proprietorship. The business which manufacturers tables chairs cabinets and other furniture is growing and Jeff is exploring the idea of purchasing a brand new manufacturing facility. Because he does not have the money to do so he believes his options are to borrow the money or to convert the business to a corporation and sell stock.

Describe the which option you believe Jeff should pursue. Make sure to explain the advantages and disadvantages of the course of action that you choose.

Answer 1

Option 1:Borrow money from Bank

Pros	Cons
The company have complete control over what you do with the money because Banks do not take any ownership position in businesses	Paying back the loan also is the company’s responsibility.Also Bank can put certain restriction on Business or ask for a security while providing Loan Thus, failure to do so can result in the bank foreclosing on the business and hurt the company’s reputation .
Bank loan is flexible because it offer the company access to a wide array of terms, fees, application requirements and interest rates, which can be negotiated and adjusted. Therefore, the company can shop around for the loan terms that best suit it and can work with the bank to make the deal as sweet as possible	Interest rates can rise, which makes a loan unpalatable or very difficult to pay back. In some cases, interest rates and other terms can change during the repayment period, making the success of your business subject to alterations in the bank's demands
The interest on business bank loans is tax-deductible. In other words, bank loans help the company reduce income tax	Banks normally require a lengthy and thorough application process before they will approve a business for a loan, especially in the case of small businesses
Bank loan enables business owners to keep cash on their hand to use as operating capital or for personal survival during a down period in your business. Additionally, if business goes bad, they may be able to protect their most important personal assets by declaring bankruptcy	Borrowing money from bank could hamper monthly cash flow. Over the repayment period, the company commit a certain amount to repaying its debt. While the funds may help the company expand initially, the debt obligations can make it difficult to keep up with monthly expenses and debt while also trying to generate cash and profits. Companies that become too leveraged with debt often get mired in stall mode for years

Option 2:Convert the business to a corporation and sell stock. In this case, I assume that the company issue common stock.

Pros	Cons
There is no mandatory payment. In other words, common stock does not require the company to make interest and principal payments on a specified schedule	The cost of issuing common stock is generally higher than the cost of issuing other types of securities. Underwriting commission, brokerage costs, and other issue expenses are high in case of common stock
Common stock is the source of permanent capital. Funds raised from common stock is available for use as long as the company exists	Common stock dividends are not tax deductible payments and are riskier than both the debt and the preferred stock
Common stock financing increases the borrowing capacity of the company. Because common stock provides a cushion against losses of creditors, the sale of common stock generally increases the credit worthiness of the firm. Thus, business firm with strong equity base is capable to obtain loan easily and common stock strengthens the equity base of the firm	The issuance/issue of new common shares may dilute the ownership and control of the existing shareholders

1. At this moment, it is hard to say which option the company should select because it depends on many other factors such as the company’s yearly revenue, expenses and net profit. Plus, it also depends on the extent in which the Jeff Blake accept to take risks.
2. From my perspective, the company should borrow bank loan to finance its new manufacturing facility in a short period of time. If the company’s financial performance with the new facility is going well, then the company can convert into a corporation and start selling stock