Sources of Finance for Starting a Business - Report Example

Name Course Tutor Date Executive Summary This report is divided into three major sections. The first section covers the financial sources for startup businesses. The next section explores the legislations that startup and established businesses must comply with in Leicester Center. The last section then presents the risks likely to be faced by any startup but in this case with the retail store in mind. Table of Contents Executive Summary 1 Table of Contents 2 Sources of Finance for Starting Business 3 Debt Financing 4 Family, Relatives and Friends 4 Commercial Finance Firms 5 Government Programs 5 Commercial Lenders Banks 5 Bonds 6 Equity Financing 6 Personal Savings 6 Venture Capital 7 Angel Investors of Business Angels 7 Warrants 7 Legislations to Comply with in Business in Leicester, UK 8 Risks likely to be faced by Starting Business 9 Marketing Risks 10 Financial Risk 10 Legal Risks 11 Management Risk 11 Staff Risks 11 Conclusion 12 Financial Reporting Introduction The process of starting a business has some requirements that must be met. These include financing and legal obligations among others. Additionally, there are very many risks that start-ups are likely to face especially when entering the market. These risks could be managerial, financial as well as market based risks. There are many sources of finance for startup business as shall be discussed in the paper. The financing options can be divided into three major types each having sub-types; debt financing, equity financing as well as government grants. The legal obligations differ depending on the country and therefore the jurisdiction in question. Mrs. Needle as been running a home-based dressmaking business in Leicester for some years now, and together with her four friends they would like to set up a retail store that specializes on the same in the center of Leicester. They have already identified a shop that is currently being occupied by a mobile phone shop. They therefore need some financing in order to refurbish the store’s interior as well as purchase stock. This report is aimed at financially advising Mrs. Needle, recommending how her friends and her could raise capital for the start-up, the relevant legislations they have to comply to, and the potential risks they are likely to face when starting the business. Sources of Finance for Starting Business Start-up capital is essential for any business that is starting with the aim of making profits. There are several sources that entrepreneurs can consider when looking for start-up capital or financing (Hofstrand). However, the first essential step is to assess the capital need of the business and the timeline when it is actually needed. Additionally, other points to consider include the security that can be provided, whether through time some ownership of the business can be given up, the working capital, and growth and development costs among others. It is noteworthy that the financial needs of businesses are not ubiquitous but vary depending on the type and size of the business in question (Hofstrand). For example, retail businesses are not as much capital intensive as manufacturing or processing businesses. The core sources of business financing are equity and debt financing. However, considering government grants could also be a financing option. Debt Financing As the name suggests debt financing involves the borrowing of funds from creditors with the agreement of paying it back alongside some interest after a specified period of time. The creditors benefit from the interests that are returned by the borrower. These forms of financing could either be secured on unsecured (Hofstrand). The unsecured debt does not involve any collateral and is more secure for the lender with reference to paying in case of defaulting. On the other hand, secured debt has collateral that is attached to cover up the cost in case of the lender defaulting (Hofstrand). Short-term debts are used in financing current business operations while long-term debts are used in financing assets and equipments. Family, Relatives and Friends When establishing a business, the founders might seek for private sources that include friends, family and relatives for funds. This may come in the form of either low interest debt capital (Hofstrand). When considering this option, there should be formality so as to avoid hurdles in the future. This means the filling in of formal loan documents with the amount borrowed, interest expected, the specified time and if need be the collateral in case of defaulting (Hofstrand). The method is cheap, quick and flexible compared to banks and other financial lending institutions. Commercial Finance Firms These firms become viable when the business is not able to secure capital from other commercial sources. The companies often agree to find a business depending on the quality of the collateral more than the performance track and the profit projections of the business (Hofstrand). The advantage of this form of financing is that its amount is lump sum compared to other commercial lenders. Government Programs Local and state governments always have programs meant to help in financing rising ventures and small businesses. The assistance is in the form of government guarantee of repaying the loan from the usual lender (Hofstrand). This guarantee provides the lender an assurance of being repaid even when the loan is given to a business that has limited assets that could be in place as collateral (Hofstrand). Some of the most common sources include Small Business Administration Commercial Lenders Banks These are the most common sources of finance for capital start-ups. The only essential document to qualify for such funding is a well written business plan, positive track record, and a number of collateral (Hofstrand). For start up businesses, it is usually hard to lay a hand on this. However, for an expanding business, this is the best option available (Hofstrand). As the business progresses and drafts profits and loss statements, net-worth statements as well as cash flow budgets, the business is assured of more funding. Bonds This is a special type of debt financing since the debt instrument is given by the company (Hofstrand). The business specifies the interest rates and when it is to repay back the principle. The business or company does not have to make payments on the principle until the specified maturity date (Hofstrand). The face value that is the price paid for the bond at the time of issue is paid back together with interest. This is a good source of finance since the payment is only done at the specified date. Equity Financing This is a source of funding where a portion of the business’ ownership is exchanged for financial investments in the business. The ownership stake that results from equity investments allows the investors to share the profits of the business (Hofstrand). It is a permanent investment in the company and is not repaid back at a later date. Some of the examples of equity financing include venture capital, business angels, personal savings, government grants, warrants and equity offerings (Hofstrand). Personal Savings This is usually the first source of money for all startup businesses. The sources include profit sharing, real estate equity, loans, and insurance policies among others. The owners of life insurance policies have the ability to borrow against the cash value. This then forms a good source of startup capital for the business (Hofstrand). The best thing with personal savings is that it gives the investors the courage to fund the business since they are able to see the commitment of the founders. Additionally, it also maximizes the control of the owner over business. Some of the savings could also be from inheritance. Re-mortgaging also forms a source of personal equity finance. The entrepreneurs only take a second and large mortgage on a private property. The money can be invested in the business (Hofstrand). This provides a low-cost finance for the business. However, in case the business fails the property will also be lost. Venture Capital This is a form of financing that is usually offered by companies or individuals who are willing to invest in private businesses (Hofstrand). However, this is not a good source for the startup such as the retail shop in question but an option as it progresses and expands (Hofstrand). This is because venture capitalists do not fund businesses that have not been established. Angel Investors of Business Angels The startup could also consider the assistance of angel investors. These people are interested in helping individuals and businesses survive, grow and expand (Hofstrand). They therefore have both economic and other plans (Hofstrand). They also have interest in the security of their investments and would make demands just as the venture capitalist. They are useful in early financing of business. Warrants Warrants are special types of sources of finance especially for long-term financing. The start-ups businesses use this as a way of encouraging investments (Hofstrand). This is done through minimization of the downside risks while at the simultaneously providing the upside potential. The owners of the warrants have the ability to buy stock in the issuing company or business at exercise price before the expiration date specified (Hofstrand).The business can also sell its stock directly to the public depending on the circumstances. This is called equity financing and has the ability to raise substantial amounts of funds. However, there must be a legal representative in such instances (Hofstrand). Legislations to Comply with in Business in Leicester, UK There are many legal requirements and decisions that businesses have to make when starting. In Leicester, UK, there lie a number of regulations that businesses have to adhere to prior to being operational. These legislations include payment of fees, market hours, non-occupational of the stalls, transfer of stalls and sub-letting, employment of young persons, conduct of the traders, conditions relating to the use of stalls, general provisions, notice to terminate or suspend and the retail market regulations (Leicester Market). The tolls and charges for the use of the stalls are approved by the Culture committee and must be paid daily. Additionally, the outstanding refunds initiated by the city council to the customers through shopping charter must be made payable to the market officer (Leicester Market). The stipulated market hours should also be adhered to. The traders are not allowed to bring goods in the market before 0500 hrs as well as after 1845hrs (Leicester Market). The market day especially for retailers may be cancelled by the market manager at their own discretion. There is also a stipulated period of nine days that the stalls must be occupied failure to which the stalls are leased to other traders (Leicester Market). The absence must be explained to the authorities. All the businesses must comply with the Children and Young Person Act of 1933 and the Employment of Children’s Act of 1973 as well as Byelaws relating to employment of young people in Leicester, UK. No child below the age of 16 years should be employed whatsoever. The young person being employed must first obtain an employment card from Leicester County Council. The cards must be produced within the market or retail center (Leicester Market). No child is to be employed in any premises that cash is handles especially in the retail center. Lastly, no child is to be employed on Sunday or school holiday for more than 4 hours for a period of six months. The tenant is held responsible for the actions of all the staff and must ensure there is compliance with the conditions of lease or license. The stall or shop must only sell the goods and products as well as services that it is licensed for (Leicester Market). There should be no use of obscene language or any act that offends other traders as well as customers. Additionally, any discriminatory or abusive behaviors are considered offenses. There should be order in the business place as well (Leicester Market). All the goods from the licensees will not be sold on wholesale or auction. Additionally, hawking and carrying of goods is not allowable (Leicester Market). Lastly, all garments and goods as well as scaffolds and poles must be positioned not less than 9 inches from the edge of the stall or shop (Leicester Market). No clothes will be allowed to hand on the corner of the scaffold whatsoever (Leicester Market). These are some of the legal ramifications in place for startups in Leicester center especially for retail businesses. Risks likely to be faced by Starting Business New businesses often come with some elements of risk alongside the predicted success. These risks pose challenges for the startups and risk them into stalling should they not be managed effectively (Scott). Prior to starting a business the investors must evaluate the risks and come up with effective methods of averting their consequences (Scott). They include market, financial, management, and regulation risks Marketing Risks The market trends keep on shifting thus posing risks to new businesses. This may include the potential customers already loyal to the competitors or when the potential customers have shifted from the service offered by the business to others (Scott). This negatively impacts the business since it poses a stiff competition to the extent of making the pricing options low. This will also affect the capacity of the business to gain a good market share. This can be mitigated through effective and well coordinated in-depth market analysis through a market research (Scott). This will help determine the market potential of the retail business’ products (Scott). A marketing plan will also help in defining the market areas that will meet the customer needs. The market research should be the guide in managing and thus avoiding the market risk. Financial Risk The financial stand of a business can make the business to succeed or break (Soni). Both internal and external matters of finance have the capacity to influence the cash flow of a business thus hampering the ability of the business to succeed (Scott). Start-ups usually fail to make financial plans and forecasts as well as create working budgets (Soni). Lack of startup capital threats the new business. Sufficient capital is required to sustain both the business and the living expenses of the owner. This can be solved by having inventories as well as working financial plan, projections, and forecast (Scott). The business’s management should also determine the strength of product in the market as well as its ability to sustain the future financial obligations of the business (Scott). Prior to launching the business the owners must ensure that they have the right financial sources. Legal Risks Small startups are likely to face legal proceedings. This could come in the form of being sued by a customer for failing in duty of care to the client, the product not meeting the standards set, staff related issues as well as a number of other issues that are liable to legal proceedings. The business must have insurance cover to cover the employer’s liability (Soni). The clients must also be assured of professional indemnity (Scott). The business should also have a legal expert such as solicitors to help in matters concerning the law. Management Risk The startup could also lack a proper organizational structure thus risking the whole startup. When the new owners have little knowledge in managing a business the success of the business is less assured (Soni)? To solve this, the owners should hire professional managers who are charged with the daily operations of the business to avoid the management risk that is widespread in most startups (Soni). Apart from hiring a manager the business could consider investing in management softwares that are available in the market (Scott). However, as time progresses, ERP softwares are the best option being that they have a number of integrated functions. Staff Risks The other form of risk for start-ups is lack of proper staffing as well as staffing related problems that may hamper the business operations (Soni). The staff could also collude to commit as well as other unethical practices that may taint the reputation of the business. The business should have well stipulated rules governing the employment conditions as well as the safety of the employees (Soni). There should be policies and procedures to be adhered to at the workplace as well as terms of payment (Scott). The staff could also be trained so as to be able to have the competence required in the industry (Soni). The business should also ensure that it complies with all the employment regulations stipulated by the government. Conclusion There are many options open for Mrs. Needle and her friends in financing the startup retail shop in Leicester center. The financial options have been divided into debt and equity for the quick understanding and also the two being the most common forms of financing startups. Prior to making any financial request the owners should sit down and draft a financial plan, business plan as well as a working budget plan. There are a number of subtypes of each form of financing as further explored in the paper. There exist a number of legislations that the business will have to comply with in Leicester center as shown in the report. Finally, the business is liable to facing financial, market, staff, legal, and management risks that also have the solutions discussed in the paper. Armed with this report the owners of the business will be able to make informed decisions that will ensure the success of the business. Works Cited Hofstrand, Don. "Types and Sources of Financing for Start-up Businesses | Ag Decision Maker." Iowa State University Extension and Outreach. Iowa State University, Apr. 2013. Web. 4 May 2015. . Leicester Market. "Rules & Regulations | Leicester Market." N.p., 4 May 2015. Web. . Scott, Sherrie. "Risks of Starting a New Business | Chron.com." Small Business - Chron.com. Chron, 2015. Web. 4 May 2015. Soni, Deepak. "Three Risks Small Businesses Face and How to Combat Them." Small Business | Start Ups | Cash Flow | Starting Business | BusinessZone.co.uk. Business Zone, 13 Nov. 2013. Web. 4 May 2015. . Read More