Financial Contracting for Mobile Auto Dealing



Financial Contracting for Mobile Auto Dealing

Introduction

Investments in newly born companies are always considered a risky business decision by many investors providing venture capital. Such a risky decision is taken only after analyzing and collecting all the relevant information and assessing the potential risks and returns associated to the new business. In this regard, many investors who are involved in financing these new ventures could be banks, private corporations, venture capitalists, angel financers, prime brokers, trusts, credit unions, collective investment schemes, insurance companies or trusts (Acevedo, L., 2012). In order to avoid financial and investment risks, these investors and entrepreneurs may enter into a financial contract that addresses the rules and legislations pertaining to financing and control rights, authority and details of collateral, date stating effectiveness of contract, the extent to which information on business is exposed to investors, respective cash flows and discount rate applicable (Triantis, G. G., 2011).

Discussion

We are assuming to initiate the business of mobile auto detailing that serves all those individuals who do not have enough time out of their daily routine life to take care of their cars. Thus, this business targets such market and offer services of car wash, pampering wheels and cleaning at clients door step. This business is comparatively a smaller business as compare to big business ideas that require heavy finance. It can be initiated with adequate finance level to fulfill the need of certain equipment that are necessary to run this business such as personal vehicle to travel, car wash and wax products, dusters, detergents etc. Its start up cost can be estimated to be about $2000 (Entrepenuer.com, 2012).

With respect to investing in new businesses, both investor and entrepreneur may agree upon certain outcomes of financial contracting, which may include, formal reports prepared stating the status and progress of revenues and operations of the business undertaken to prevent information asymmetry issues or agency problems, the outside investor may add a clause of provision of funds in return of ownership in equity or a convertible debt or partnership in the business to prevent associated business risk, an outside investor may also become authorize of entrepreneurs collateral for a time being in order to prevent foreclosure risk, an outside investor in the given business scenario may only invest in start up phase of business as the stated business idea does not require additional funding and complex financial assistance but this situation may give a rise to problem of moral hazard between the parties and increases the opportunity and liability of monitoring the business regularly, venture capitalists may also add a clause which is acceptable as well and states the requirement of background check, assessment of market competition and status, and opportunities of potential progress and development in the market. In addition, investors and business may mutually agree upon the more investors' involvement in the project to decrease the chances of failure and increase the consistency of flow of finance. Both parties would also agree upon payment of venture ...