Potential Funding Sources - Essay Example

Research Project Table of Contents Potential Funding Sources 3 Available Funding Bodies 3 Borrowing from Banks and Financial s 3 Angel Investors 4 Advantages and Disadvantages of Different Mentioned Funding Bodies 4 Borrowing from banks and Financial Institutions 4 Angel Investors 5 Recognition of Appropriate Funding Body 6 Reason behind the Funding Body’s Selection 7 Why the business venture attractive to the potential funding body? 8 References 12 Potential Funding Sources The essay is all about the business start up of a new company that focus on unique daily consumer goods. The business owners are seeking for funding of 100,000 Pounds to start up the mentioned business. This retail company is trying to enter in the potential retail industry. The retail company will sell innovative and useful kitchen appliance related products that are utilized in daily life. It is difficult for a new start up company to arrange such a lump sum start up business operation capital. There are various funding options for the retail company that are discussed below. Available Funding Bodies The new start up retail organization is seeking for required funds from several effective funding bodies in order to start the new business in the potential industry. There are two major funding options for the organization, such as lending capital from renowned commercial banks and borrowing funds from the angel investors. However, it is important for the organization to develop an effective business plan so that the funding bodies can believe that the particular business has huge potentiality. Borrowing from Banks and Financial Institutions The new kitchen appliances retail organization can propose different financial institutions and commercial banks in order to borrow the start up business capital. It is true that the commercial banks and several financial institutions generally offer both secured and unsecured landings for business start up in order to meet the working capital requirement. The commercial banks usually offer unsecured loans to the start up business organizations depending upon the management’s judgement (Leach and Melicher, 2011, p.110). On the other hand, the banks generally offer the secured loans against the organizations’ deposited collaterals and securities. However, the unsecured loans usually do not demand any kind of collateral or security from the start up business organizations against the lending of loans as start up business capital. The commercial banks or different financial institutions usually provide unsecured loans to the business organizations in the form of corporate credits and overdrafts. Angel Investors Several angel investors are also can be considered as the important funding bodies for the start up kitchen appliances Retail Company. The angel investors are also considered as informal investors or business angels. These angel investors used to have vast experience about several business forms. These investors generally belong to the wealthy and rich businessman segments. The rich and affluent angel investors or the business angel generally provide the required start up fund to small and medium organizations during the start up stage depending upon the future prosperity and growth of the business. It is important for the Start up Kitchen appliances Retail Company to offer a significant part of the new business to the investment angel funding bodies. The investment angel usually pool and provide individual funds to the start up kitchen appliance retail company during the start up stage to meet the requirement of initial working capital. Advantages and Disadvantages of Different Mentioned Funding Bodies There are several advantages and disadvantages of sourcing start up fund from the commercial banks and angel investors. These advantages and disadvantages are discussed below. Borrowing from banks and Financial Institutions The commercial banks or different financial institutions can agree to provide the loan as start up business fund if the banks or the financial institution scan realize that the start up business organization can repay the loan and develop a favourable credit history within few times of the business operation. The kitchen appliance retail company can get the required funds from the commercial banks or financial institutions by providing security or collateral against the paid loan. In addition to this, the new start up organization has to pay the loan interest at a fixed rate. It is the major advantage for the organization. In addition to this, the commercial banks have lesser probability or threat to disappear during the economic distress (Smith, 2012, p.106). Moreover, the start up organization has various options to choose funding commercial banks and financial institutions based on the performances and reputations. There is only challenge for the kitchen appliance retail company if the organization select commercial banks and financial institutions as funding bodies i.e. several conservative banks can deny paying the start up business loan due to the absence of any credit history of the start up capital. Angel Investors The advantages and disadvantages of sourcing fund from the investment angels can be explained based on the nature of the angel investors’ functioning. The angel investors generally provide start up fund to the new business entrepreneurs based on the prosperity of the business. The investment angels generally provide start up business funds through various financial channels, such as venture trusts and venture funds (Gregoriou, 2008, p.20). Major advantage of this option is that the business enterprise can gain unlimited borrowing of start up business funds from the angel investors. In the case of high requirement of start up business funds, the angel investors can be considered as valuable source of start up business funds. The kitchen appliance retail company can face several risk factors in case of sourcing of start up capital from the angel investors as the angel investors generally demand high return on the made investment. This can affect the profitability and financial stability of the start up organization. However, the organizations may require more external funds in order to repay the instalments. In addition to this, the investment angels can disappear if the investment portfolio gains loss. It can create future challenges for the start up kitchen appliance retail chain. Recognition of Appropriate Funding Body The appropriate funding body for the start up kitchen appliance Retail Company have been identified based on the available options to source start up fund. The management of the retail company is trying to start up their business in a rented store. The organization is trying to bring creativity and innovativeness in the business operation. The organization will provide differentiated and innovative kitchen appliances. This kitchen appliance retail company compose 99 percent market share. Therefore, the innovative and creative kitchen appliances can be considered as secondary product in the product segment. The commercial banks can be considered as the important funding option for the retail company during the start up stage of the business operation. But, the organization can find it difficult to borrow the fund from the banks in the absence of any collateral, security, mortgage or credit history. It is true that commercial banks or several financial institutions oppose lending funds absence of security (Gitman and McDaniel, 2008, p.136). The banks always try to avoid the option of unsecured loan. According to the business operation strategy, the retail company seriously requires an effective interaction with the manufacturers in China. Taxation on import and transportation of logistics cost from chain can create huge financial challenges and risks for the start up kitchen appliances retail company. The banks can deny lending loan considering start up costs and absence of any security or collateral against loan. Looking into these above aspects, it can be stated that the angel investors will be appropriate investment option as the investors will take interest if the organization can develop effective business plan and give high interest on the made investment. Reason behind the Funding Body’s Selection It is clear from the above discussion that the angel investors are selected as the major funding agency for the new start up kitchen appliance Retail Company. The retail organization selected the investment angels for the gathering required start up funds i.e. 100,000 pounds. The retail company will explain and convince the investment angels about the prosperity of the imported kitchen appliances from China. Angel investors generally provide capital to the business organizations based on the competence of the business. In addition to this, these venture capitalists generally give valuable suggestions along with start up capital that can help the organization to adopt effective business strategy (Editors, 2006, p.256). It is clear from above discussion that the commercial banks generally avoid the option of unsecured loans. On the other hand, the angel investors generally fund the capital to start up the business (Osnabrugge and Robinson, 2000, p.52). Most importantly, the organization can get entire start up fund form the angel investors if the retail company can convince the investors about the prosperity and future growth of the business. It is highly important for the organization to accept that the angel investors will demand partial ownership rights against their funding. However, this risk is quite limited. It is quite difficult for a start up company to provide huge amount of mortgage or security or collateral in order to achieve the start up business loan. It is discussed earlier that the organization is going to start up a retail business that will deal with the imported kitchen appliances from China. There are several risks factors associated with this business concept, such as high logistics, transportation cost, foreign currency fluctuation and high import taxation. However, the angel investors will try to support the organization by providing effective suggestions and funding. Therefore, it can be stated that this option will be more flexible comparing to sourcing fund from the commercial banks or several financial institutions. Why the business venture attractive to the potential funding body? This part of a business plan is one of the most important factors for a new venture. The attractiveness of a new business venture to the potential funding bodies or investors depends on the degree of innovation in the product, capability of the product to create actual need to the target customers, USP of the product, threat of substitutes if any available in the target market and finally the most important part which is forecasted financials of the new ventures which includes estimated breakeven time, breakeven sales and return on investment. The above image is the visual representation of the product i.e. Potholders with its different purposes. The product is a set or complete package of modern kitchen utensils which can be used for different activities during the process of cooking. The above image indicates the degree of innovation possessed by each type of Potholder and their advantages. Therefore, it can be said that the product can easily create high need among the target customer especially for USPs which are multicoloured stylish design, user-friendly and time saving usage process. As the product is very innovative and it will be launched as first time in its kind, therefore, the threats of substitutes will be very low. Therefore, the new business venture is attractive for investment in terms of potential demand of the product in the target market. The next and most important factor of attractiveness of this new business venture is its forecasted financials. This includes cost structure of new venture including manufacturing and operating cost, profitability evaluation, breakeven point of the investment and return on investment of this new venture. Organization Name: UNIC Date: 05/12/2013       Budget for the period From:1.02.2014 To:31.01 2015     Profit £19040 Expense £   Expense £97, 885 Item     Source of Income Sales Equipment £   The average income for each product is £ 1.36. The Volume is 14000   Salary & wages £37000       Training program £3750       Advertisement £200       Equipment £14,700       taxation £15,035       Postal & delivery £12,000       Rental of retailer and Furniture £15,200       Others £300   Total Sales 116,925 Expense £97, 885       Balance 19,040 The above table represents the detailed financial budget of this new venture. From the detailed quantitative analysis of financial budget it can be said that the business is also attractive to its potential funding bodies. An important attractive factor is that the business is expected to earn profit in the first financial cycle of its start up period. This means the venture expects that total revenue will be high in substantial amount than the total cost of goods sold and total operating expense in the first financial cycle. Per unit income is also attractive i.e. 1.36 and they expect gross unit sales to be 14000 units. Therefore, financial budget is really attractive to the angel investor and it indicates high feasibility of the business. Ratio Analysis Total Sales (£) 116,925 Net Profit (£) 19040 Profit margin ratio 16% Total Expense (£) 97,885 Total Revenue (£) 116,925 Expense to Revenue 84% Net return (£) 19,040 Total Investment (£) 100000 Return on Investment 19% The above table indicates three most important financial ratios of the new venture. The ratios have been calculated on the basis of forecasted financial budget. Profit margin ratio is 16% which indicates attractive profitability of this start up business. Profitability supports the high feasibility of this business as it is much higher than interest rate of long term borrowing from bank. Expense to revenue ratio also supports the profitability ratio and it is also reasonable for a start up business as expense is generally much high in the start up stage. Finally the return on investment is the most attractive factor for this venture as the potential funding body i.e. the angel investor will get near double than any long term investment in debt instrument available in the market. Therefore, this business is high feasible in both market demand and financial perspective. References Editors, V., 2006. Master of Business Administration Career Bible. New York: Vault Inc. Gitman, L., and McDanniel, C., 2008. The Future of Business: The Essentials. Stamford: Cengage Learning. Gregoriou, G., 2008. Encyclopaedia of Alternative Investments. London: CRC Press. Leach, C., and Melicher, R., 2011. Entrepreneurial Finance. Stamford: Cengage Learning. Osnabrugge, M., and Robinson R., 2000. Angel Investing: Matching Start-up Funds with Start-up Companies. New Jersey: John Wiley & Sons. Smith, H., 2012. Learn Small Business Start-up in 7 Days. New Jersey: John Wiley & Sons. Read More