MBA640 M3 Final Project SNHU External Capital Funding Proposal


Question Description

L.S.Starrett expansion into Costa Rica Medical Device manufacturing. L.S.Starrett is seeking a $30 million dollar loan to acquire Philips respiratory business unit. Assistance is needed to justify the financial impact mentioned in the attachment.

Tutor Answer

School: Carnegie Mellon University



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A business can finance its project through internal or external sources. The primary source
of internal funds is retained earnings, but a company may as well utilize a sinking fund created for
specific functions. Some of the external sources include loans from financial institutions, bonds,
commercial paper, and share issue. Companies can also form strategic alliances to facilitate each
other with specific resources. The sources are advantageous and disadvantageous in certain aspects
according to the terms upon which they are issued or received by the borrower or user as discussed
Internal Versus External Financing
Pros of internal financing
Funding growth prospects through retained earnings is an effective strategy for a business
because it doesn't add to the debt profile of the company which makes the company safe from
pressure and compulsion to commit its resources to repayment. It is also a way of avoiding interest
expenses through regular mandatory payments to financiers. Internal funds allow an entrepreneur
to maintain full control of the business rather than having the company assets leveraged by
creditors, investors, and partners as security for the finances advanced to the company (Corsi &
Prencipe, 2018).
Disadvantages of internal financing
Internal financing can be slow especially when funds have to be accumulated over time
thus running the risk of missing presently available business opportunities. Internal funding of
expansion projects may cripple the business by reducing the funds needed for routine activities of
the firm. Financing the organization from within forfeits the business experience that comes with
outside investment despite the owner having to part with a certain degree of control of the



organization. External partners can be a source of substantial ideas for running the affair of the
Advantages of loans
A loan is available for its term of about three to ten years and so not repayable on demand unless
there is a breach of its conditions. Some loans are tie over the useful life of the project they finance.
It is possible to renegotiate a repayment holiday at the start of the term of the investment in which
the business will pay interest while the principal repayments are frozen which leaves the business
with the choice of planning in advance the best way to repay. Loans do not take a percentage of
ownership of the company and no sharing of business profits except for the regular interest
payments. The interest payments are also fixed making the repayment process predictable and
allowing the business to plan well for the application of the funds to relevant projects of the
Disadvantages of loans
More massive loans come with strict restrictive clauses that a company must adhere to such
as proving the financiers with periodic information. The interest payments are not flexible, and
repayment is compulsory regardless of the financial situation of the company. Thus, this may
create cash flow problems. Loans require collateral against the assets of the entity, and sometimes
it extends to the proprietor's possessions which poses a significant risk of losing both the
investment and the business.
Merits of Commercial paper
It generates more funds as compared to other sources including internal finances. The cost
of a commercial paper to the firm that issues is lower than that of commercial loans. It reduces the
cost of capital to a company when it is highly rated since the rating is a requirement for commercial



papers. It is the best way for the firm to utilize interest fluctuations in the market and select the
suitable interest rates. It is highly liquid and freely transferable between transacting parties with a
wide range of maturity that makes it even more flexible. It is highly secure, and it has not any
conditions of restriction. It is the most accessible gateway for quitting from an investment. The
paper is unsecured, and therefore no leverage is necessary on the assets of the company.
Commercial documents are a good source of continuing funds because their maturity is
customizable to match the needs of issuing firm. Matured commercial papers can also be repaid
by selling new ones. A company can save some excess funds on commercial paper and earn a
return as a result (Corsi & Prencipe, 2018).
Demerits of Commercial Paper
It is only available to financially secure and selected blue chip companies. The method is
not accessible to new organizations and those with average ratings. There is a limitation on the
amount of money a company can raise through a commercial paper depending on the deductible
liquidity available with the financiers at any given time. It contains a certain degree of inflexibility
such that should a firm not be in a position to redeem its paper at maturity due to financial
difficulties; it is not possible to extend the duration of the paper as the terms are rigid regarding
the redemption.
Pros of Issuing Bonds
It is an effective way to get capital without making investors become part owners of the
business and influencing any decision-making process. A company benefits from interest
deductions against income which reduces the ta...

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