FIN501 CASE 4

FIN501 CASE 4

1. Capital is the essence for the success of ventures. Ventures need to use capital to run the business, such as product purchases, shop rent, to make profit, and even need more capital if engaged in a large number of commercial projects. Capital is enterprises' blood, driving force behind economic activities of enterprises and sustained impetus. Therefore, effectively raising capital is an important factor for the enterprise creation, survival and development. However, as the main body involved in a dynamic environment, enterprises will encounter more varieties of financing instruments and more complicated financing environment. There are various ways of raising money, but is the way you have chosen the best or most suitable for you?

Insufficient financing causes many small businesses to close down. Proper planning of the initial capital is a critical energy input for your business or expansion. "Generally, a company's operations can be financed through debt and some form of equity financing." (Timmons & Spinelli 2004, p.451) These are two basic ways to raise capital for your business.

2. Debt is often obtained in the form of a loan which must have loan interest. The most common sources of funds through debt are commercial banks, and other potential lenders may also include trust companies, credit unions, private investors, finance companies and other institutional lenders (e.g., insurance companies, pension funds). As an entrepreneur, you should be familiar with the lending requirements of the financial institutions before determining the type and the source of your debt financing. And the classification of debt may include short-term debt (less than 1 year), line-of-credit financing (to be drawn upon as needed) and long term debt (up to 10 years). (Stevenson 1999, p.185)

In addition to debt financing, you can obtain funds by equity financing as well. Through equity financing, companies can raise lots of money from family members, friends, business angle, partners and going public, but they may or may not participate in the business operations.

"More cash is preferred to less cash, cash sooner is preferred to cash later, and less risky cash is preferred to more risky cash." (Timmons & Spinelli 2004, p.443) Before you go ahead and seek investors, you should ask yourself how much money you need to raise in order to create your venture. You may firstly look at your own assets such as personal savings, securities, bond, insurance surrender value, pension funds, real estate, which are the ...