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Business Financing and the Capital Structure - Essay Example

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The investors incur losses if the business fails. The owners share profits when the business prospers. Some companies such as Yahoo and Microsoft have become billionaires after their business was…
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Business Financing and the Capital Structure
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"Business Financing and the Capital Structure"

Download file to see previous pages Raising finance through friends and family members is the least expensive way to access funds since it avoids high interest loans. Friends and family members are more patient than lenders, such as banks.
The major disadvantage is that the owners must give out approximately 50% of their business to the outsiders. This puts the venture in danger of losing their business fully. Some of them may over expect the amount of profits. This brings misunderstandings because they expect more than can be afforded.
Investments from family and friends require a good explanation about the impact of the venture. The financial arrangements should all be business-like. Formal business processes should be followed regardless of the relationship between the lender and the borrower. The details of the borrowed money should be outlined. This involves the means of payment, and what would happen in case the business does not prosper (Wolff, 2000). The borrower should not accept more money than the investor could afford to lose. It may render the company bankrupt. Finally, a written contract should be availed for the business owner, friends, and family. The business should treat the money as bridge financing to the next financing level (Boa and Edmans, 2007). Any payment schedule developed should suit the entrepreneur and the lender. An exit plan should be available describing how the investors will cash out the investments.
Debt capital is loan obtained that must be returned with interest. Debt capital form of financing has higher interest rate than loans given to small companies since they have higher risks of return trade off than bigger corporate consumers do. The entrepreneurs maintain complete ownership of the business. Borrowed capital is a liability on the balance sheet.
The major advantage of debt financing is that the lender cannot own the business. Those who lend capital only require interest on the loan given. Debt financing cost ...Download file to see next pagesRead More
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