As an entrepreneur considering financing growth
and development, Andy must realize that deciding
on the form of funding requires careful analysis
of the firm and how it could utilize capital which
does not compromise the equity stake of the company.
The market is filled with various kinds of financing
but some suit the needs of the entrepreneurs while
others do not. The first form is through credit
banks which provide capital that reflect the collateral.
This form of financing is easy to acquire and
does not have external interference in the operations
of the firm.
Alternatively, Andy has the choice of equity financing.
There are two types of equity financing, venture
capital and angel capital. Angel capital basically
involves the financing support from friends, family
or relatives. This type of financing offers the
entrepreneur a peace of mind as "financiers"
know that the entrepreneur would "make it".
The result is that although the cost of financing
is the same, the entrepreneur has the advantage
of long term financing for growth. Alternatively,
angel capital is limited to the number and amount
of funds required for the business to the number
of friends, relatives or family who are willing
to give the amount.
Venture capitalists on the other hands are professional
equity funding investors who are willing to take
the risk of small and start up business at a high
cost of capital. Venture capitalists are usually
wealthy individuals or major financial institutions.
The positive side of this type of financing is
that the providers are willing to take the risk
of financing and they would not interfere with
operations but the cost of financing is high.
Though they are willing to see the company mature
in the long run yet they would prefer to see progress
within a short period of time before the venture
capitalists take part in the management. Furthermore,
they also mandate that a member be included in
the board of directors to monitor operations.
From the above list of three major sources of
financing growth, the author is of the opinion
that bank financing is most appropriate for the
business of Custom Stitches. This is because Andy
requires a source of funding that does not interfere
with this business endeavors and who is able to
understand his growth place at double the rate.
The choice of a funding source should be one that
does not take much of Andy's right to management
yet allow the freedom to expand his business as
he desires. In bank funding, Andy can provide
collateral of $700,000 through his business valuation.
Secondly, the bank would not interfere with his
company's operations. And thirdly, the rate of
interest would be low as cost of capital as compared
to the other forms of funding. If he establishes
the growth rate as double in a short period of
time then, bank's rate of return is small amount
to pay for the profit that he is going to reap
in the future.
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