Financial Sources for Demo Pty Ltd-Free-Samples for Students

Question: Discuss about the Financial Sources for Demo Pty Ltd Company Startup. Answer: Financing Sources for Demo Pty Ltd. Company Startup Like public Companies, Demo Pty Ltd Company (private), require funding for a range of reasons. A business characteristically requires greatest financing amount during start and expansion (growth) stages. However, the company might need a cash injection for RD, new equipment or inventory. Whereas financing alternatives for a private company are several; every choice is accompanied by specific stipulations. Funds from personal savings; family and friends; bank loans; private equity via angel investors; alongside venture capitalist are all alternatives for financing throughout a private company life cycle. Start-up Level: Appropriate Source and Inappropriate Source Assumptions: The business owners have a considerable amount of personal savings The business is a new one and hence no retained earnings The business is starting as a fresh private company and no partnership required The business is not big a size to warrant colossal capital (at start-up) Appropriate Sources Personal Savings/equity: This must be the first place to seek for money when starting a business. The personal resources will include profit-sharing/early retirement funds, real estate equity or even cash value insurance policies. The personal resources are the most desirable to finance the business operations at the start-up stage (Verheul Thurik, 2001). The business owners must first pull from saving, take a distribution from a retirement account. Take out a 2nd mortgage on the residence. Only if they dry up will the owners may borrow from family and friends. The reason for personal saving preference is that it gives owners much more control and they do not need to pay back or even depend on outside lenders/investors, who might decide to withdraw their support at any point. Also, the business will retain full possession hence 100% received from future profits. Friends and Family: The owner may look for private financing from friends and families. This can be regarding equity financing whereby friend/relative receives a possession interest in the company. Nevertheless, the investment has to be made in similar formality used with external investors (Romano, Tanewski Smyrnios, 2011). Private financing from close friends and relatives come mostly in small increments between $5,000 and $10,000 with a flexible repayment. Friends and family who invest in the business usually do not take active operational roles. In this case, it is recommended that the business should only take the money regarding borrowing rather than having those friends and relative invest in the business (Mason, 2006). The reason for preferring friends and family borrowing is that; the business owners will still be under the owners and also the repayment is flexible as they are close to each other. Inappropriate Source Bank Loans: The source is not appropriate when the business is starting because first, banks require proof of strong financial track record which is lacking because it is a startup. It is hence never appropriate at start-up because the owners lack revenue sources and levels of profit to get approved (Holmes Kent, 2011). Automatically, a start-up private company is unqualified for bank loan financing. However, it would be advantageous as it provides smart financing source was it an established business. This is because it allows extended repayment over the period with foreseeable fixed monthly repayments. Overdraft: The overdraft is inappropriate at start-up phase because it is attached to higher interest, has a risk of seizing, and lethargic debtors collection. However, it would be appropriate during expansion because it handles timing mismatch of funds flow and helps keep a good track record. Commercial Papers: A commercial paper is never appropriate during the startup because the firm is new and hence lacks the desired high-quality debt ratings that would have otherwise help it find buyers unless they offer significant discounts. Expansion: Issues and Sources of Financing Issues: At Expansion At expansion, the private company will need colossal financing. This is because it will have to require cash infusions for RD, new equipment, and inventory. The company will be showing substantial revenue but may not be realizing a profit. The financing here aims at the provision of working capital for initial business expansion as the business is producing and shipping items and has expanding account receivable and inventories. Still, the company still has some instances where the progress has not been made (Cassar, 2014). Financing Sources: Appropriate Sources Bank Loan: Bank would be beneficial because it will provide smart financing source since the company shall have been established. This is because it allows extended repayment over the period with foreseeable fixed monthly repayments. Commercial Papers: With the high-quality rating in the future, it might be used to get short-term debt to finance account receivable, inventories and meet short-run liabilities because it doesnt need to be registered with SEC so long as maturity is under nine month/270 day hence it is a cost-effective source. Inappropriate Sources Venture Capitalist and funds: While it might appear appropriate by taking a minority position, they will make the owners lose control of the business. References Cassar, G. (2014). The financing of business start-ups.Journal of business venturing,19(2), 261-283. Holmes, S., Kent, P. (2011). An empirical analysis of the financial structure of small and large Australian manufacturing enterprises.The Journal of Entrepreneurial Finance,1(2), 141. Mason, C. M. (2006). Informal sources of venture finance. InThe life cycle of entrepreneurial ventures(pp. 259-299). Springer UK. Romano, C. A., Tanewski, G. A., Smyrnios, K. X. (2011). Capital structure decision making: A model for family business.Journal of business venturing,16(3), 285-310. Verheul, I., Thurik, R. (2001). Start-up capital:" does gender matter?".Small business economics,16(4), 329-346.