Question

Based on the different financing options we discussed throughout the semester, please discuss how financing might differ between a small to moderate growth company such as a local bakery versus high-growth, high potential company such as a hot new technology or App. Please be sure to discuss the options for each and why the options you choose make the most sense.

Answer 1

There are mainly two types of financing options based of the business model

• Debt Financing
• Equity Financing

Debt Financing - Debt financing is a short/long term loan taken from lenders for which lenders are paid interest on predetermined time frame and principal on maturity. In debt financing lenders doesn't hold rights and ownership in the business it is simply a loan taken for business purpose which may include capital raising, acquisition for the lenders get paid interest.

Two major forms of Debt financing are :-

1. Bank Loan - A loan taken from financial institution with a predetermined interest rate and maturity and mostly paid on monthly basis which which is combination of principal and interest amount
2. Bonds - Bonds is a financial instrument which is used my organisations, Government to raise fund for which the lender receive interest and sum upon maturity of the bond.

Equity Financing - Equity financing in raising of capital through issue of stock in which the buyer of the stock holds ownership and rights in the companies decision.

The major equity financing forms are :-

1. Shares - Shares are units of ownership in the company for which the shareholder receive dividends and other rights in the company decisions.
2. Venture capital - Venture capital in finance provided by investors, investment banks and other financial institutions which are believed to have long term growth potential. This is created by providing limited partnership to the lenders
3. Crowdfunding - In this a large number of people are asked for small amount of money for the capital requirement of the business
4. Business Angels - Business angels and high net worth individuals who can fund the small projects in exchange of ownership equity

Now taking into consideration the above financing option and applying it on the examples provided in the question

For a small company such as local bakery I will mostly prefer Bank loan under debt financing as I will not need to share ownership of the business and will be paying interest and principal on regular basis which would simultaneously help me decrease my principal amount and to pay this amount in the given timeframe I can set my goals as required and do the business with ease.

For a high growth high potential company I will either go for Bonds under debt financing or Shares under Equity financing

For bonds I can have the terms setup as per the forecast of the business and will be paying interest and principal without sharing ownership of the company.

For shares I can raise capital by sharing ownership of the company and paying the shareholder dividends as per the performance of the business

Please let me know if you are satisfied with answer and provide me your valuable feedback. Thank you