Thunder Egg: Sources of Finance - Assignment Example

? Thunder Egg – Sources of Finance Contents Contents 2 Introduction 3 Sources of Finance Available to Small Businesses 3 Crowd Funding 3 Business Angels 4 Bank Loans 5 Government Initiatives 5 Private Investment 5 Conclusion 6 List of References 7 Thunder Egg – Sources of Finance Introduction Thunder Egg, established in 1990, opened up its second store in the Manchester in 2006, owing to its continued success. The company deals in various products which include clothing for women, jewellery, gift items, and other accessories for women. The company also offers customized products as per its customers’ likings. Thunder Egg, like other small and medium enterprises, is faced with the challenge of securing finance necessary to build up the required working capital and satiate its financing needs. In this regard, the literature suggests that there are various options available for small businesses. Sources of Finance Available to Small Businesses The most important concern of an investor or a small business owner, like Thunder Egg, is the sources from where finance can be raised to satiate financing needs of the business. Among various options available for small business entrepreneurs, crowd funding, business angels, bank loans, government initiatives and private investments are considered as amongst the most preferred ones by them. Whether the business is small, medium or a large multinational corporation, the need for securing sufficient finances holds significant importance for the entrepreneur, which in turn determines the success of planned strategies and business plan (Rodriguez, 2003; Moles et al., 2011; Baker & Martin, 2011). The common sources of finance identified earlier have been discussed as follows: Crowd Funding It is often witnessed that small and medium enterprises rely on unconventional means of obtaining finance in most of the times. The conventional means can be considered as venture capital and/or obtaining loans from financial institutions (Lambert & Schwienbacher, 2010; Abdulsaleh & Worthington, 2013). Although these conventional means are easy options to be exercised by them, but due to certain inherent limitations of the small and medium enterprises, these options are not considered by them. As for instance, there are two main issues faced by such entrepreneurs, which are inability to motivate and convince providers of conventional funding, such as banks, and secondly lacking sufficient assets to pledge against the finances to be obtained (Lambert & Schwienbacher, 2010). Keeping in view these limitations faced, crowd funding is often considered as a preferred source of financing a small or medium business (Belleflamme et al., 2011). The crowd funding is considered as a beneficial source of finance, as it enables the business to obtain cost efficient finance. Moreover, since the stakes of the business are shared by a crowd, therefore the diversity of opinion and a better oversight of the operations can be assumed (Kleemann, et al., 2008). However, some researchers consider the method to be a disadvantageous option as it enables people from every background and varying knowledge of the business to become part owners. This in turn results in inefficient management of the business (Lambert & Schwienbacher, 2010; Abdulsaleh & Worthington, 2013; Moles et al., 2011). Business Angels Business angels are those investors who provide finance for businesses and have interest in the business’ success (Abdulsaleh & Worthington, 2013; Romano et al., 2001). Investments made by business angels are considered as highly risky. This financing option is for those companies which fall under the SME category and thus do not have general options available for obtaining required finance. The foremost benefit for entrepreneurs to obtain finance from angels is that they do not require any formalities to be fulfilled and often provide long term loans on easy terms (Abdulsaleh & Worthington, 2013; Lambert & Schwienbacher, 2010). However, one major disadvantage of acquiring finance from angels is that it puts them in a position of power and dictating the operations of the business (Baker & Martin, 2011; Moles et al., 2011). Bank Loans Bank loans are considered as the most readily available option for businesses, whether small or large (Abdulsaleh & Worthington, 2013). One most significant advantage of obtaining finance through bank loans is relief in tax, as interest to be paid on finance obtained is deductible for tax purposes. Apart from this, it is also considered a better option for entrepreneurs to opt for bank loans because no transfer or sharing of ownership takes place. However, for small businesses, obtaining bank loans is a tiresome process, as they are required to furnish detailed and thorough details of their business, its prospects, profitability and other indicators. In addition, the cost of obtaining loans from banks is also higher as compared to other options (Baker & Martin, 2011; Moles et al., 2011). Government Initiatives Apart from the means of obtaining finance which are made available by private lenders, governments also take part in setting up facilities and resources to cater the financing needs of businesses of varying size (Abdulsaleh & Worthington, 2013; Romano et al., 2001). Small and medium enterprises can avail government’s initiatives to procure finance, which include banking institutions solely established for providing short term and medium term financing for SMEs and other micro finance institutions. However, obtaining finance from governmental institutions, like bank loans, also require streamlining the operations as per the requirements of finance providers. Moreover, there are often unnecessary restrictions or conditions imposed and non-negotiable terms are attached to financing agreements (Abdulsaleh & Worthington, 2013). Private Investment Private investment or private equity is also considered as a preferred source of financing the operations of a small and medium sized business enterprise (Romano et al., 2001; Abdulsaleh & Worthington, 2013). In private investment or equity issuance, various private investors pool in their investment to provide the working capital for starting up a business. The private investor may not necessarily be an individual investor; in fact an individual firm may also provide funds to a new business as a private investor (Baker & Martin, 2011; Abdulsaleh & Worthington, 2013). The advantage of such a means of obtaining finance is that this option is more attractive for investor due to the fact that ownership is shared; however, it is also considered disadvantageous on the same grounds, as ownership is split and so are the profits (Romano et al., 2001). Conclusion The review of various financing options suggest that there are advantages and disadvantages of securing finance from either of the sources; however, for Thunder Egg, the bank loans option and government initiatives seems more appropriate, as there are no intentions shown by the owners of the business to part their ownership with another investor and share profits. Moreover, if the company opts for bank loans, it will also be able to make use of tax benefits. List of References Abdulsaleh, AM & Worthington, AC 2013, ‘Small and Medium-Sized Enterprises Financing: A Review of Literature’, International Journal of Business and Management, vol. 8 no. 14, pp.36-54. Baker, HK & Martin, GS 2011, Capital Structure and Corporate Financing Decisions, Kolb Series in Finance, New York. Belleflamme, P, Lambert, T & Schwienbacher, A 2011, Crowdfunding: Tapping the Right Crowd, Core discussion paper 2011/32. SSRN. Kleemann, F, Vo?, GG, & Rieder, K 2008, ‘Un(der)paid Innovators: The Commercial Utilization of Consumer Work through Crowdsourcing’, Science, Technology and Innovation Studies, vol. 4 no. 1, pp.5-26. Lambert, T & Schwienbacher, A 2010, An Empirical Analysis of Crowdfunding, Louvain Business School, Belgium. Moles, P, Parrino, R & Kidwell, DS, 2011. Fundamentals of Corporate Finance, John Wiley & Sons Limited, West Sussex. Rodriguez, AG 2003, La Realidad de la Pyme Colombiana, FUNDES International, San Jose. Romano, CA, Tanewski, GA & Smyrnios, KX 2001, ‘Capital Structure Decision Making: A Model for Family Business’, Journal of Business Venturing, vol. 16 no. 3, pp.285-310. Read More