SOURCES OF FINANCE

Business Decision Making

Business Decision Making

Task 1.1: Alternative Sources of Finance

Being an entrepreneur, a new business in retailing of consumer services will be set up by a group of individuals. Following is the analysis of business investment nature, costs and fundraising sources.

Description of the Business

In the UK, retail industry has grown significantly with the changing consumer trends and preferences. The newly established business will provide services in the grocery retailing of food and non-food items for consumers. At the start up level, the business will be set up on small scale with a limited offering in identified consumer services. The business will offer products and services in the domestic store, as well as online.

Estimate of Required Business Investment

In the pursuit of starting a new business, the group of young entrepreneurs will require an estimated amount of £ 150m. Since the grocery retail market of the UK is highly competitive, the new business will require significant amount to meet the initial cash outlays and business expenditures.

Available Sources of Finance

The objective to start up a new grocery retail business can be met by raising funds through any of the following sources of finance (Barclays, 2009, p. 4):

New business can be installed with an informal loan from relatives or close friends or even from personal savings

Assistance from venture capitalists or private equity investors

Financial institutions such as banks

Loan from local authorities

Funding from government in the form of grants and loan can be a source to finance a new business

Task 1.2: Implication of Sources of Finance

The need to finance a new business can be satisfied from any of the above mentioned sources of finance. However, each of the identified sources may have certain degree of influence on or implication of the start up business. For instance, owners of the new business might need to share their business control with investors in case of private equity or venture capitalist. Likewise, an informal loan from a sleeping partner (relative or friend) will ask entrepreneurs to share their business ownership with their partner. Nonetheless, loan from a banking institution or local authorities may provide a tax deductable source of finance, which may have positive implication for the new business (Barclays, 2009, p. 4).

Task 1.3: Appropriate Sources of Finance for Business Project

Analysis of the identified sources on the basis of benefits and associated costs shows that the following three options are more appropriate for setting a new grocery retail business. However, each of the selected options may have certain advantages and disadvantages.

Advantages and Disadvantages of Bank Borrowings

The desired new business can be started from bank borrowing such as overdraft facility or loan. Since loan or debt is tax deductable, bank borrowings will allow the new business to pay less tax and retain business profits. Moreover, it may help the business to project and estimate the cash flow of the business to manage liquidity and business operations. On the contrary, sole reliance on bank borrowing may result in increased business risk due to the growing component of financial ...