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

I can generate the fund through-

A. Equity financing-it will include various types of financing methods by which my equity will be dissolved like venture capitalist financing and I will be seeking capital in exchange of the ownership, and this will provide me with chance of growing my business without having the payment liabilities. It will also help me to generate higher rate of return by expanding my business without having much stress of debt financing.

There are risk associated with this kind of financing as this will lead to dissolution of the share capital, and it will also be leading to the lack of the control on the business and interference in the normal business structure, of the company by the new share holders

B. Debt financing-I would be looking to raise long term loans in order to Fund my project so that it can help me with the tax advantage as well because debt financing is always associated with tax advantage and interest are tax deductible in nature.so it can help in expanding my business, if the overall rate of return on my business is higher, than the cost of debt

Problems associated with the debt financing is that it will be having a fixed obligation of interest payments, and even if I am not making any profits, I will have to pay the payment from my reserve, so it can lead to the solvency risk on the company but it will not be leading to the dissolution of the control.

So these are the two methods, I would be looking for generating of fund for my new business.