Access over 20 million homework & study documents

search

FIN 100 WK 8 Assignment 2 - Business Financing and the Capital Structure

Type

Homework

Rating

Showing Page:
1/6
Running head: ASSIGNMENT 2: BUSINESS FINANCING AND CAPITAL STRUCTURE
1
Business Financing and Capital Structure
Your Name
Strayer University
FIN100
Date
It is mandatory for any small business to require money particularly for those in the
starting stages of development. It is difficult to receive money due to the recessional fallout that
led to venture capitalists losing money. The two forms of funding accessible to small businesses
are debt and equity financing. These financing enable any small business to expand and grow
using borrowed capital. The challenge is what form of financing a business should choose. The
difference between the two finances is that one is from an investor and the other from a bank. It

Sign up to view the full document!

lock_open Sign Up
ASSIGNMENT 2: BUSINESS FINANCING AND CAPITAL STRUCTURE
2
is necessary to regard the advantages and disadvantages of both before choosing the best method
(Parker, 2012).
Equity financing entails receiving a check from an investor to avoid debt. It does not have
the hassle of interest or repayment, but the money comes with some strings attached to it such as
sharing profits with the investor. Some of the advantages of equity financing include:
1. It has less risk compared to a loan since it does not require paying back the
investor. For any business that does not want debt, equity financing would be the
preferred choice.
2. The investor has interest in the long-term view therefore they have no rush for
their ROI (Return on Investment).
3. Using a venture capitalist adds advantage to the business through the credibility
and network of the investor.
4. It is not necessary for the business to direct their profit into repayment of loan.
5. The investor takes the risk since the business does not have to repay incase the
business fails.
Equity financing may have very attractive rewards, but it also comes with its drawbacks.
Some of the disadvantages of equity financing include:
1. It may need returns that may be higher than the rate of a bank loan.
2. It is difficult for a business to offer the investor expected ownership and profits
percentage.
3. Investors expect you to consult them on any big decisions regarding the business,
which may at times lead to disagreements.

Sign up to view the full document!

lock_open Sign Up
ASSIGNMENT 2: BUSINESS FINANCING AND CAPITAL STRUCTURE
3
4. Irreconcilable agreements may mean the owner cashing in on their shares and
leaving the business to the investor.
5. It is hard to find the appropriate investor.
Debt financing involves using a bank to get finances necessary for business expansion.
The business association between a bank and an investor varies greatly. For instance, the bank
relationship will not require any part of the business. The problem is that a business may take on
excessive debt that would paralyze growth (Parker, 2012). Some of the advantages of debt
financing include:
1. The lending institution has no right to interfere with business operations, and does
not own any part of the business either.
2. The loan interest is tax deductable.
3. The association ends immediately the business completes paying off the debt.
4. There is an option of either taking a short term loan or a long term one.
5. Interest and principle are familiar figures in budget planning.
The disadvantages include:
1. The business needs to pay back the loan in a fixed period.
2. Having problems with cash flow and relying on debt will mean trouble repaying
the loan.
3. This form of financing is capable of leaving the business in danger during difficult
periods when sales sink.
4. Too much debt will flag a business as high risk with potential investors.
5. It is difficult for the business to expand with the burden of repaying the loan.

Sign up to view the full document!

lock_open Sign Up
User generated content is uploaded by users for the purposes of learning and should be used following Studypool's honor code & terms of service.

Anonymous
I was stuck on this subject and a friend recommended Studypool. I'm so glad I checked it out!

Studypool
4.7
Trustpilot
4.5
Sitejabber
4.4