Week_5_Responses **michael smith**
RonRob44
nvp_week_5_discussions.docxLearning Activity/Discussion #1: Financial Planning: Regarding capital formation, discuss the three basic types of capital acquisition, working capital, fixed capital and growth capital, describe the advantages/disadvantages of attaining such funds via equity or debt sources, and how best to apply the capital mix to your potential or ongoing business venture.
Response 1:
The three basic types of capital acquisition are working capital, fixed capital, and growth capital. Working capital is often used by a small company to manage the day to day operations or small operations such as paying out payroll, buying inventory, marketing cost and paying the companies bills. The advantage of working capital is that it’s one of the easiest loans to obtain especially if you are in a stable financial situation. Another advantage is you are able to receive funding without having the option of giving up control of your company; there are no restrictions to how you use your loan and how you receive it. The disadvantage of working capital is your inability of being able to pay the expenses for the company, you’re not able to make quick decisions for your company, your business accounts will be on the brink of being negative, it also leaves for creditors to give you high interest rates, and there will be pressure to collect from customers on their accounts. Fixed capital is used to run the day to day operation of the company for production and distribution of goods and services. Along with purchasing the permanent fixings of assets for the company such as company cars, land, buildings, and the equipment being used in the company. The advantage of fixed capital is that it improves your equity in your business, improves financial analysis, and it provides stability for your business. The disadvantage of fixed capital is that the equipment that was purchased depreciates, and the assets are sometimes hard to sell later on down the line. Growth capital is where owners use it to make improvements on their business whether it’s an expansion project or it’s to change the business around completely. The advantage of growth capital is that owners are able to get capital to expand and change the business to make some profit by having their business to grow. These different types of equity would be beneficial to my new business venture by it would help me establish relationships with creditors, I would be able to improve my business, make necessary changes when I need to, and I would have more room to grow my business to make it successful.
Response 2:
According to Tiffany C. Wright working capital is the short term cash and it is determine by subtracting the current assets and current liabilities (Wright paragraph 1). It is a liquidity financial ratio that determines how liquid a company is in the short term and their cash capabilities in the short term, finance a company give you the advantage of not acquiring debt and not selling equity so in you are the only owner or the company is own by few people they can keep their equity. However, a company that finance their operation base on their working capital can have issues growing the company in a fast passed, also if they get a big project they may compromise all their capital in the project unless the company produces a lot of cash or convert it very fast;, Wright points out that the ability to pay the bills will e reduce by this financing system and it increases the risk of stopping operations (Wright Paragraps 3) According to Wright, "working capital financing can eliminate any gap between cash flowing into operations and cash flowing out" (Wright paragraph 3).
Wright, T. Advantages to working capital to finance a business. Small Business, Chron. Retrieved from http://smallbusiness.chron.com/advantages-working-capital-finance-business-70576.html
According to Investopedia, fixed capital are those fix assets essential for the company as land buildings and tools to transform raw material into the product the company sales (Investopedia paragraph 1). The advantage of fix capital is that it is use for the long term since their useful life is usually very long, so they can be use as a collateral for a loan and they also increase the value of the company if the company prefer to finance through equity. The disadvantage is that they can be a liability since usually buildings and equipment is acquired through debt and also the the re-financing on the value of the building an so will depend if the value has increase or decrease so it is not a secure tool.
Investopedia. Fixed capital. Investopedia. Rerieved from http://www.investopedia.com/terms/f/fixed-capital.asp
Capital growth according to Investopedia is the increase in value of an asset or investment (Investopedia paragraph 1). For what is explain in the article the increase of the value of the buildings as well as the investments such as stock is what creates a growth of capital. So a company can take the advantage of growth capital to finance the business by selling some equity at a higher price, re-finance a mortgage of their buildings of land properties, or selling the stock investments and make some money because of the increase i value.
Invstopedia. Capital growth. Investopedia. Retrieved from http://www.investopedia.com/terms/c/capital-growth.asp
Learning Activity/Discussion 2: "Housing Market and New Venture Development" A traditional source of capital acquisition for a new small business venture has been borrowing against home equity, either as collateral or for liquid assets. Consider the current economic state of the overall US and your own local residential housing market, the tightening of credit and "subprime" credit (for borrowers with less than optimal credit histories) and the challenges and limitations of home equity, and how these can impact new venture development and access to capital.
Response 1:
Home equity as a financing tool has always been a go-to method for some home owners. The house market where I live is actually doing very well and there is definitely room for a home equity line of credit or a fixed equity loan. However, that being said, I am not a fan of collateral financing as a first resort. one should not jump to the collateral financing too quickly until the business can prove it can stand on its own and earn enough capital to cover the payments. Not only would a business owner risk losing a business in case of failure, but also a house. If a business is being built to earn the owner passive income, and he or she still has a full time job and can guarantee the equity payments, then this would be a first source of lending for me.
Response 2:
I currently live in San Diego, California and the home prices here are significant. The average 1,500 square foot home with two bedrooms and two baths will run over $600,000 in a decent area of town. This is up to six times the price of a home in the neighboring state of Arizona. The housing bubble seems to be at bay, but the losses incurred in the last one are scary for anyone considering leveraging their largest asset. I believe it would make sense to use a modest home here as leverage, but only if my company was domiciled in another state. The thought process being I could use a loan of $200,000 for my company while only leveraging 1/3 of my personal assets. I think exhausting other areas of investment or loan streams makes more sense before heading into this risky bet. If the entrepreneur cannot achieve a loan through a bank or creditor due to credit history or a bad debt to income ratio, they may want to look to friends and family who are willing to invest with patience on their return. With that said, if I decided to go all in on a business I would most likely sell the $600,000 house and rent an apartment while investing the profits in the business. I believe reducing your personal expenses first, may help reduce the anxiety of going all in with your life's investment.
