The Sources of Risk Financing - Research Paper Example

FINANCE AND ACCOUNTING Introduction Ordinarily, inventive and growth-oriented small businesses often need to raise capital or equity from external sources. This is because of the lack of their own resources to raise funds and they cannot access loans. However, many investors are reluctant to invest in start-ups and innovative firms because of the high risks and transaction costs. They also tend to tarry to offer loans to this start ups businesses because they estimate that the expected returns will not compensate for the risk. (Mark, 2013).This paper tends to exploit the sources of risk financing and the activities that are involved. Findings and analysis One of the most common sources of risk capital financing has been the angel investing. Most small companies that are starting have endeavored to in various online platforms with the aim of raising money. Ordinarily, an angel investor which involves equity finance uses their individual disposable finance to make their personal decision about making the investment. Normally shares are taken by the investor into the business in return for providing equity finance. This is with the aim of not only providing business with money to grow, but also bringing their experience and knowledge to help the company achieve success. This is the most significant source of investment in start up and early stage businesses in search of equity to grow the business and other investments. (Anonymous, 2010) Another source includes the venture capital. Normally venture capital aims at adding value in addition to the capital, towards the companies in which they invest. This reveals efforts of these investors to help the business grow and realize a greater return on the venture that has been undertaken. Ordinarily, venture capital is a type of equity financing that addresses the funding needs of entrepreneurs and companies that fails to seek capital from more traditional sources that includes public markets and banks. (SBA, 2012)This could be because of size, assets, and stage of development of the business. As discussed it can be noticed that angel investment differs significantly from venture capital finance that invests in businesses via managed funds that has been raised either through private or public money.Normaly,the venture entrepreneur director will invests the money on behalf of the fund. The capitalist should ensure that the investment is profitable and that it makes returns for the fund’s investors.Normaly,venture capital funds are more risk averse compared with angel investors’ and thus make fewer small investments in start and seed stage. This is due to high administration costs and the need to be very selective to ensure that there are returns on the fund that was invested. Therefore, angels’ investors are becoming more important in funding new ventures. This is done through giving smaller amounts of capital to companies which have failed to fund themselves through established venture capital market. (Anonymous, 2010) On the other hand, both angel investors and venture capital offer unsecured capital by assets to young, private companies with the potential for rapid growth. This implies that this investing essentially involves a high degree of risk. Nevertheless, venture capital is often long-term or “patient capital” allowing companies time to mature into profitable firms as compared to the angel investors. (SBA, 2012) In the recent past most companies that have established and small start-ups businesses have commenced the usage of crowd funding as a means of getting some capital for their investments, see graph. Normally, crowd funding involves is a large number of individual persons that makes little financial contribution. This done overtime, a substantial sum of money can be collected to help develop projects or products. This is motivated by the enthusiasm of people to take part in a crowd funding campaign. This is not based on any inevitable return on investment because of its high risks. Therefore, the motivation lies mainly in helping others achieve their projects. This has enabled many developed states to develop even further. (Schumann, 2014) Graph 1 (Schumann, 2014) According to Massolutions report of 2013, titled "2013 CF the Crowd funding Industry Report", approximately 2.7 billion USD has been raised worldwide via crowd funding platforms: 1.6 billion USD in North America; 945 million USD in Europe and 110 million throughout the rest of the world. (Schumann, 2014) Europe and the US have recorded the biggest growth in crowd funding since 2009 and this has enabled the goal of the company to be achieved. NYUs Courant Institute entity used the crowd funding platform to collect money for a decentralized social network that allows users full control of their own data. In a span of six weeks, the project, Diaspora, received 200,000 USD from 6,400 supporters as well as a huge amount of publicity. (Schumann, 2014) Corporate risk capital fund s is commonly used by the state government and other NGOs to fund projects especially in the construction industry.Normaly,the funds experiences numerous risks refers and liabilities and posses dangers to a corporation or a project. The government risk management team ensures that a set of procedures that minimizes risks and costs for businesses and other projects. (James, 2010) For example, the government injected $1.2 billion to construct the roads so as to benefit from the toll fee and the parking fee in California and Florida. These locations are subject to numerous risks, California locations are subject to earthquakes, while the ones in Florida will encounter hurricanes. The roads are often destroyed by the natural disasters when they occur and this costs more expenses to the government than income. For the government to fund these projects there should be a substantial population of the users upon the region who need the services so as to avoid incurring more government losses. (James, 2010) Angel investor typical company aims at rising between $750K and $1.5 Million. The customers typically put in between $150K and $350K as a group. The individual investment is t 25,000 but ranges from 10,000 to 100,000. The members should show omitted for them to be funded and they must comply with the rules of SEC for them to be funded. The progress of the businesses should be reported to the angel investor. The company values the businesses through monitoring its profitability and the number of assets. (Matthwew, 2014) The project which is called Indiegogo is an entity based in Texas which deals with ARTtv: A creative arts show for children. The amount collected through crowd sourcing in this platform is $36065.The project is to cost $50000.The project is to assist the children nature their skills especially in arts. This funding towards this service industry is meant to empower the children towards future self employment. The firm is often valued by the number of children that benefit through this project. (Austin, 2015) Habif, Arogatic and Wynne Company are based on Georgia. The entity aims at expanding the economy of Georgia by enlarging its base of wealth in creating business. This ensures that the number of quality and high paying jobs are created to eliminate joblessness. More business is funded by the angel investor which has focused to achieve its goal significantly. The company has decided to fund the banking industry in small microfinance and other individual investment. The company uses the working capital to value the projects. In order to meets its goal the company only funds the businesses that are ready to employ a maximum of 20 or fewer people at the time. The annual amount for investing that is received is $50,000 which can be obtained by investing $142,857 into one or more eligible businesses per year. At this level, the company credit will offset $833,333 in Georgia taxable income. Public private partnership funds are involved in medium to long term arrangements between the public and private sectors whereby some of the service obligations of the public sector are provided by the private sector, with clear agreement on shared objectives for delivery of public infrastructure and/ or public services. These funds are usually common in transportation industry.Normaly; the partnership excludes service contracts or turnkey construction contracts, which are usually ranked as public procurement project.(Ken, 2011) The application process focuses heavily on the creditworthiness of the project and its sponsor. This is one of the methodologies used to value the firm. This approach is good since it seems to do away with biased political considerations in favor of objective measures such as creditworthiness. (Bruce, 2010) Ordinarily, the states and other project sponsors will have various set of project finance tools to aid the projects. This includes the Tolls, user fees, and other project-based revenue sources. The transportation project will finance innovations available to project sponsors will include , State Infrastructure Banks, Section 129 Loans, Grant Anticipation Revenue Vehicles, Private Activity Bonds, TIFIA Credit Assistance, and Build America Bonds. (Philip, 2010) Normally, the proponents of a NIB tend to overlook the technical aspects of federal financing and instead focus on the idea that it would increase the total volume of infrastructure investment over current levels. This rests on the assumption that the constraining factor for increased infrastructure investment is access to capital. For example the government injects $13billion annually to put up an impure public good that is the parking places. It is expected that the government will charge minimal packing fees as to compare to other private. Ordinarily this is large and riskiest projects though access to financing is not an issue. This is because the municipal bond market will absorb the new issuances. The accurate constraining variable is that public’s willingness to pay the taxes and fees desirable to service project debts. (Philip, 2010) Conclusions In conclusion it is evidenced that various entities gives risk capital to the business with an aim of helping state development. This is because the businesses gives skills and also create employment to a number of youth. It is also evidenced specific conditions are to be achieved by the business for the entities to fund them. The funding involves high risks that have very minimal expectation of return. Therefore; the entities try to monitor the business to ensure that they do well. Works Cited Anonymous. (2010). Introduction to Angel Investing . Retrieved 2015, from http://www.ukbusinessangelsassociation.org.uk/entrepreneurs/introduction-angel-investing Austin. (2015). ARTtv: A Creative Arts Show For Kids. Retrieved 2015, from https://www.indiegogo.com/projects/arttv-a-creative-arts-show-for-kids Bruce, L. (2010). Public-Private Partnerships. Retrieved 2015, from https://www.americanprogress.org/issues/economy/report/2014/12/08/102515/public-private-partnerships/ James, K. (2010). Corporate finance. Retrieved 2015, from http://www.wisegeek.com/what-is-corporate-risk.htm Ken, P. (2011). Public-private partnership. Retrieved 2015, from http://ppp.worldbank.org/public-private-partnership/overview/what-are-public-private-partnerships Mark, P. (2013). More risk capital. Retrieved 2015, from http://ec.europa.eu/enterprise/policies/finance/risk-capital/index_en.htm Matthwew, P. (2014). Investment process. Retrieved 2015, from http://www.angelinvestorforum.com/investment-process/ Philip, P. (2010). US Federal highway administration. Retrieved 2015, from http://www.fhwa.dot.gov/ipd/finance/ SBA. (2012). US small business Administration. Retrieved 2015, from https://www.sba.gov/content/venture-capitalhttps: Schumann, D. (2014). The Crowdfunding Trend. Retrieved 2015, from http://en.reset.org/knowledge/crowdfunding-trend-03102014?gclid=Cj0KEQjwrPqnBRD56dGe1o_WlZsBEiQAb5ugt_PqivvkoQslgBGgiLNa49-O2HKUd98lXuBZBbfmxpAaAqIr8P8HAQ Read More