FINANCE

Managing Financial Resources and Decisions

Managing Financial Resources and Decisions

Alternative Sources of Finance

The business to be set-up is a restaurant, which requires a huge sum of money that can be gathered by using alternative sources of finance. Among all available sources, there are certain most significant ones that are discussed below.

Borrowing from Bank

A restaurant can be set-up by accessing the loan from banking institutions in the form of overdrafts or long-term loans. This option is mostly used by business to access cash for a new company or expands the existing one, since it is an easy and significantly cheap source of finance (Bendrey & West, 1996, p.19).

Venture Capital Investment

Venture capitalist(s) investment is increasingly used by new businesses to transform their idea into a real business. This source of finance include a private equity financing by venture capitalist(s), as they seek investments in new businesses at the cost of defined ownership in the organization (Petty, Leslie, & Hoy, 2011, p.372).

Personal Savings & Informal Loans

A restaurant can also be set-up by using personal savings or informal loans i.e. grant and loans from relatives or friends as a seed capital for establishing a new business.

Implications of Identified Sources

Each of the financial sources may have its own implication, particularly the control and ownership. Various sources imply various concerns for the business, and at times the ownership concerns also arise. Such as, when a company fails to meet the debt obligation of informal loans, the lender may urge a business to offer a specific portion of business ownership. Similarly, in case a company fails to meet the debt obligations of banking institutions, bank may have a lawful claim over the pledged assets or stocks of the business, hence take a portion of business ownership (Pearsoned, n.d., p. 75). Likewise, there are different implications for control mechanism, such as local authority control is considered by federal or state government and these types of sources can be sought at a micro-economic level with varying control mechanisms. In contrast, an individual control system is established in case of informal loans that can be sought out at micro level (OECD, 2006, p.3).

Advantages & Disadvantages of Sources

Different sources of finance are selected for the business based on the advantages and disadvantages. These sources include borrowing from bank and venture capital investment. Bank borrowing enables the business to critically plan its business cash flows as it involves proper payment system. It will also offer a tax shield to the business due to finance cost at a significantly low risk of financing. However, this option can result in increased business risk since the company has to pay finance cost (interest) no matter it is in profit or loss, thus also indicating the risk of bankruptcy in case of excess dependency on this option (Chandra, 2005, p.248). Venture capitalist investment will provide various value added services like information, business networking, or resources that is essential for starting-up a prosperous ...