Sourceof funding 1: Venture Capitalists.A venture capitalist is aninvestor who gives a small amount of money to small or growing businesses to helpthem start-up properly. Venture capitalists are willing to invest in companiesbecause they can earn a huge return for their investments if these companiesare a success. Venture capitalistscan also experience very major losses when the companies they invest in fail,but these investors are often so wealthy that they can afford to take the riskswithin the funding of young, unproven companies that show that they have agreat idea and a great management team. Venture capitalists mainly look forstrong management teams, a large potential market and a very unique ordemanding product, or service with a strong advantage. They also look foropportunities in industries that they are familiar with, and they look for thechance to own a large percentage of the company so that they can influence itsdecisions.
The venture capitalist usually takes a big share of the company andalso a large share of the company’s profits. But if they fail then they tooalso have to pay for the loss as they share part of the business. An example ofa venture capitalist firm is Global Founders Capital (www.globalfounders.vc). Theyare global investors that have a track record of building billion dollarbusinesses around the globe including platforms like, Facebook, LinkedIn, etc.they have major offices in Europe, Asia, Latin America and USA.
Sourceof funding 2: Bank Loans.A bankloan is a fixed amount for a fixed date with regular fixedrepayments. The interest on a loan tends to be lower than an overdraft.
The interestrate is usually 2%-5% Apr and the period in which the payment is to be paid isoften 3-10 years. However, a bank loan doesn’t provide more flexibility than abank overdraft. The business commits to meeting the bank loan repayments andinterest otherwise the interest would increase the interest amount, you mayhave to pay a fee around £30, depending on the amount you loaned, and thelender can also report you to credit reference agencies for your missedpayments. An example of a loan is: A business borrows £40,000 for 36 months(3yrs) at an interest rate of 73% APR representative. This means that the totalamount to be repaid is £44,506.80. You would then have to pay £1,236.
30 everymonth. Sourceof funding 3: Bank Overdrafts.A loan arrangement inwhich a bank extends your credit up to a maximum amount which is called anoverdraft limit. A current account customer can write cheques or makewithdrawals.
The most common form of business borrowing, an overdraft is a typeof revolving loan where deposits are available for re-borrowing, and interestis charged only on your balance goes below zero, this is an overdraft. It is ademand loan; the loan can be cancelled at any time by the lender at itsdiscretion, without any warning notice or explanation. If the overdraft is securedby an asset or property, the lender has the right to access savings accounts ortake you to court in the case that the account holder does not pay.
Forexample, you might go to a tech shop and want to spend £8,000 on 2 T.Vs, asound system, a projector, and a gold plated smartwatch, but you only have£2,000 in your account, you would be allowed to go a certain amount below zero.If your balance goes to £-6,000 youmight have to pay the bank back at an interest rate of their choice. Sourceof funding 4: Personal savings.Money that someone has put away for non-immediate use. For example, you might use personal savings to save up for an expensive purchase such as a house or a car.
In general, it is recommended for one to maintain personal savings to cover three to six months of living expenses, but in the matter ofbusiness, it is recommended to save up money before starting a business. Thisis so that if anything goes wrong or you are not making the profit you like orthe business is failing, then at the very least you have money saved up to helpyou carry on with life/to try something new, or carry on trying to make thebusiness a success. Nowcompare these 4 sources of funding, identifying the strengths (positives) andweaknesses (negatives) of each one. If you are aiming toachieve a higher grade for this Assessment, you might also wish to identify whichsource of funding would be most appropriate for your own business enterpriseproject, giving reasons for your answer. Venturecapitalist: Advantages: The main advantage of venture capital from the view of a business, isthat it can give you a source of financing to facilitate rapid growth.
Forinstance, if you have an amazing, unique business idea but just you don’t haveenough money to bring it to the market by yourself before othercompetitors/inventors/enemies enter the market, venture capital can allow youto quickly create and expand the business, gaining brand recognition beforecompetitors enter the market as well.Disadvantages: Venture capital investmentsinvolve giving away a share of the ownership of the business in return for theinvestment. When the business owner accepts venture capital, he/she is nolonger the only owner of the business, they must give some share of ownershipof the business to the investor as well as a share of the profits, and lossesif there are any. This means that the business does not have to pay back theventure capital as it is technically a trade, but the original business ownerloses 100% control over the company. Venture capital investors will have a sayin management decisions and may attempt to push the company toward rapidexpansion and an exit from the market either by being acquired by a largercompany or through an initial public offering. BankLoans:Advantages:the only thing you need to worry about is makingyour regular instalment payments on time. You must pay the full amount when thebank demands it so there are no alterations to be concerned about.
Anotheradvantage is that banks don’t monitor how you use your loan, as long as youmake your payments on time, so you can invest it however you want. Another advantage,is that it’s cost effective. The interest rate is very low at a maximum ofaround 8%. Also, the interest you pay on the loan is a tax deductible expense.Disadvantages: The payments must be paid ontime, not a day late otherwise you have to pay a fee or you can even have yourassets seized. It can be difficult to obtain a loan if you don’t have anyassets. If you get a loan with a variable interest rate, the interest changeswith the market conditions. This can stop you from making your own financialplans for the near future.
Bankoverdrafts:Advantages: It helps to keep a goodpayment history as any of the payments made with a cheque does not bouncebecause of insufficient funds. It alsohelps in ensuring that payments are made and no late payments penalties arefaced, as payments would be made even if there is no balance in the account. Because the interest is calculated on the amount ofmoney used, you can save a great amount in interest costs as a normal loan istaken on a fixed interest rate. In other loans, you have to pay interest even ifyou are not using the money. An overdraft is flexible in the sense that you cantake it whenever required for whatever amount (up to the limit given) and foreven as less as one or two days. Disadvantages:Overdraft have a higher interest rate than normal loans, the interest rateusually 8%-15%.
Also if you exceed your overdraft limit, the fee/charges youhave to pay/face will be a lot worse/higher. Your assets can be seized if notsecured but only under the circumstance that you don’t make you payments. Thebank however, can cancel the overdraft at any time, without any notice anywithout any reason whatsoever. Personalsavings:Advantages: You will knowexactly how much money you have available to rum/start your business and won’thave to spend time securing assets and finding less reliable sources of fundingfrom investors or banks. You will also keep full ownership of the business asthere won’t be people investing and wanted share capital. Funding yourselfmeans that u will live under your boundaries and under your rules/expectations.
You will also know where exactly your budget is to be spent.Disadvantages: Using your own money to fund your business can put a strain on yourfamily/personal life. You might not have enough money remaining to cover yourliving costs. If you fund your business yourself, you will have tofind/keep your own contacts and mentors. Opinion:In my opinion I believethat a bank loan is the best source of funding, for a small business, is a bankloan.
I think this because it is something easy to get, and the interest rateis much lower than an overdraft for example. The only major worry you have isto make you payments on time, otherwise this could lead to a fee/fees or evenhaving your assets seized. Another reason this source is better than, for example,having a venture capitalist invest in your company, is that the lender (thebank) doesn’t gain any share capital of the company. They will have no say inyour decisions and will not receive any percent of the profit. Another plus tobank loans are that you can use your money however you may please. This couldbe on equipment or staff or just silly things that you like.
The banks don’t monitorhow or where you spend the money or even how much you spend in one go.