FINANCE - LEVEL 4

Managing Financial Resources & Decision Making

Managing Financial Resources & Decision Making

Part 1: Criteria for Pass

Different Sources of Finance Accessible to the Company

In today's highly globalized and rapidly advancing technological world, the idea of establishing an IT company seems to be a flourishing one. However, to set-up such as business requires a huge amount of investment. Accumulation of this investment from various sources of finance holds an immense importance, since the type of funding used by the newly established businesses plays a vital role in its capital structuring and future prospects. Thus, sources of finance to fund a business must be selected carefully; where, there are several sources available in the market. Among these sources some are highly significant and used by the companies, including borrowing funds from bank, using personal savings, getting venture capitalist funding, equity shares, informal grants or loans, and some others (Fleming & McKinstry, 1991, p.138). A business can borrow funds from bank, which is an easy and cheap to obtain the funds. In addition, personal savings of an owner(s) can also be used as well as grants and loans can also be taken from family or relatives, known as informal loans (Needham, 1999, p.99-108). On the other hand, a business can seek funds from venture capitalist that is basically a private equity financing, which provides funds to prosperous business ideas at the cost of defined ownership in that business (Siddaiah, 2011, p.326). Hence, there are various options of funding accessible to the business. Implications of Identified Options of Funding

Several sources of funding for new business are identified; where, each of these sources holds their own implications in varying ways. For instance, borrowing funds from bank offers tax savings to the business; however, venture capitalist funding results in more preference on capital gains and therefore emphasized more on capital structure that offers maximum after tax income (Baker & Martin, 2011, p.26). As far as ownership is considered, informal grants and loans may imply that in case of default the business has to provide a specific portion of the company to the lenders; on the other hand, in case of bank borrowing, pledged securities or assets are legally claimed (Pearsoned, n.d., p. 75). In addition, the span of control is also implied from the identified sources of finance, i.e. informal loans are associated with individual control system, but state or federal level funding sources assumes different mechanism of control (OECD, 2006, p.3). Thus, various sources provide various implications for the business control and ownership. Advantages & Disadvantages of Sources Identified As Suitable Sources for Business Funding

All of the sources of finance associate certain advantages as well as disadvantages; however, the cost benefit analysis or weight-age of benefits over cost determines which sources are suitable for funding. Borrowing funds from bank in the form of long term or short term loans or overdrafts offer flexibility to the capital structure by changing the credit amount of the new company within allowed ...