Management HW

Deliverable 5

As a new business venture, it is important to access capital that will be used to fund the business operations for the first few months, before the business becomes stable. These will then be paid off in a manner that is acceptable to both the lender, and the new enterprise. In some cases, capital can be issued in exchange for shares in the business enterprise. Sources of capital can include personal finances, family and friends, angel investors, debt financing and equity financing.

Personal finances

The founders of a new business enterprise might have some personal savings. They can use this money to start off the business, after which they can source for external funds (Shane, 2008). Investors are more receptive to companies whereby the founders have also invested their own capital. It shows that they are confident in the viability of the business venture.

Friends and family

People within the immediate surroundings of the entrepreneurs such as friends and family, can offer capital to the entrepreneurs. It involves little regulations given that all one needs is the trust that they have built based on personal relationships. The advantage of this source of capital is that little or no interest is charged. The disadvantage of this source of capital is that they might interfere with the operations of the organization (Welter, Smallbone & Isakova, 2006). This can cause conflict between the entrepreneurs and the investors. To ensure that personal relationships are not affected, the entrepreneur should strive to pay back the capital loaned as soon as possible.

Debt financing

It refers to capital that is obtained from financial institutions in the form of loans. It is difficult for entrepreneurs to obtain lines of credit, given that most banks require borrowers to have security to act as collateral (Welter, Smallbone & Isakova, 2006). A person must have a proven record with the financial institution to enable them qualify for loans. Due to the scope and size of this business venture, it is highly unlikely that banks will offer the startup required. In addition, they also charge high interest rates that lower the margins that are due to new entrepreneurs.

Equity financing

It arises when entrepreneurs raise capital that is needed to fund the new business by selling shares in their business (Shane, 2008). Investors who use offer equity financing usually focus on high growth businesses that will quickly offer a return on their investments. The disadvantage is that the entrepreneur will have reduced voting rights in regards to the business.

Angel investors

These are investors who fund startup businesses. It is more informal than loans that are issued by banks. In most cases, angel investors purchase shares in angel businesses, wait for them to grow and then sell off their shares for profit. Despite the ease with which they can be obtained, the requirements of the angel investors can be demanding and they will have a mandate regarding the strategy that is used by the new enterprise.

Pro Forma Income Statement

References

Shane, S. (2008). The illusions of entrepreneurship: The costly myths that entrepreneurs,

investors, and policy makers live by. New Haven, Conn: Yale University Press.

Welter, F., Smallbone, D., & Isakova, N. B. (2006). Entrepreneurs in transition economies.

Aldershot: Ashgate.