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Individual Project Unit 4 - Essay Example

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Whenever a close friend or family member provides the money required to start-up a new business venture, regardless of whether they assume the role of partner or simply receive a portion of the company profits, there is a tremendous risk to the business. Primarily, the stress…
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Download file to see previous pages This creates a situation where a silent partner begins exerting their pressure on the company leadership (in this case a friend or family member) which can jeopardize future relations or future lending opportunities.
Oftentimes, as well, because friendship and family relationships are usually quite informal, the receiver of the start-up funds will neglect to put any formal agreement into contract form. When this occurs, if conflict arises about the progress of the business, disappointment and mutual anger can occur, which could often cause internal conflict which is apparent to the customers, diminishing profitability when sales decline.
Having identified the risk of relationship funding, it is important to identify other sources of financing in order to prevent damaging long-term camaraderie with the acquaintance lender. As such, the business had identified one possible option as a term loan, which is provided by a banking institution. Term loans involve a specific amount of money, usually loaned at a term of five to 10 years, based on projections of future profitability (Longenecker et al). Though this is probably one of the most stable methods of borrowing money, there are potential risks to the receiver of the funds. For instance, a business that takes out a term loan must have a competent method of forecasting cash inflows and matching future periods of revenue to meet the loans repayment terms. A business which does not plan accordingly will experience a cash flow crisis, potentially harming the future operating potential of the business.
Another type of financing option is asset-based lending, which involves receiving a line of credit (usually from a bank) which is based on asset value (GE Capital, 1999). For instance, assume that the company maintains regular payment in accounts receivable or maintains inventory which, when resold, can be liquidated for ...Download file to see next pagesRead More
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