Question

Beverly’s new fusion restaurant has been in business for 6 months. It is doing great! Each weekend she has more reservation requests than the restaurant can handle. Beverly decides she would like to raise some capital to help the restaurant grow to keep up with the demand. What would be an appropriate choice for Beverly to consider in order to raise that capital?

Answer 1

Beverly has different alternatives to raise capital and it should be based on the fact that cost of capital should be lowest, while value addition should be maximized. On this basis, Beverly should opt for the following choices in the order of preference.

First choice:

Beverly should take funds from her own savings, relatives, parents and friends. It will raise a decent size of the funds without any legal obligations and paper work expenses. So, it is the safest and most trusted choice.

Second Choice:

Beverly should go for the bank loans for the expansion of the restaurant. Here, Beverly has to prepare a business plan and project the financials. It will help convince the banks to help her with a loan that can meet the funding requirement. Beverly has already brought capital and it will work in her favor as banks never finance 100% of the project. Cost of loan is lower than the cost of equity with less paperwork. So, it is a good alternative.

Third Choice:

Beverly  should opt for the equity financing. Here, she can go to a venture capitalists (VCs). VCs will provide capital, but they will take a share of the company running restaurants. Here, cost of equity is higher than the cost of debt. Otherwise, Beverly  can opt for the public listing, but it will be very expensive for her as per the size of the business. so, VCs will be a good idea for her.

Above choices can be followed by Beverly .