Presently I am running a used book store which is being funded by a rich relative. But, I will have to determine some alternative sources of funding as my rich uncle had died and I need money as my business is flourishing day by day but I can’t sustain the growth until I put more investment into the business. I have narrowed it down to two modes of funding: loan or equity.
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If I take loan I would have to pay interest and that will increase my expenditure. And, if in the future if my business faces some downs instead of ups the lenders will not sympathize with my situation and will want their money along with interest back. If I become unable to repay the loan I will come under the list of defaulters and getting more loans in the future will be a difficult task for me. Attaining loan also has its advantages, as my business is running very successfully there is a good chance that I will easily get the loan. Moreover, I can get both short and long term loans and my profit is my profit, I don’t have to share it with shareholders (if taken equity financing).
If I decide on equity funding my investors will become my partners in the business, they will have a share in my profit as per their investment ratio. If I choose this option for the financing I will have to give the investors dividends, that is, a share of my profit. Additionally gathering finance through equity financing has some legal issues that have to be kept in mind, also the key insights of the business have to be discussed with the investors and their suggestions have to be considered as well. This may slow down the process of making decisions and conflict may arise because the aim of the shareholders and my own will be different from each other. Both will want to maximize their own profit. My priority will be my bookstore, I want to expand it and make it grow more and more but the shareholders will want immediate gain. This process of raising finance takes time as I will have to do a lot of paper work and invite the public to buy my shares. So if I want to finance my business through this way I will have to quickly start the process. A plus side to this mode of funding is that when I will suffer the loss the shareholders will also share this loss with me therefore the burden from my shoulders is decreased.
In a small business such as a retail store the owner is the sole authority, he makes the decisions on his own and that very decisions decide the success or failure of his business. I to have been presented with a question before me that will influence my business success. I think that I will go for the loan option. I have come to this decision as I don’t want to share authority of my business with shareholders. Previously my uncle was funding me, he never used to interfere in my work and always gave me room to experiment and try out things my way. This is in turn the key to my success. I know that I will be able to turn my business into something really big but I can’t do that if I have shareholders on my back. So this is why I have decided to get a loan from a bank. I do know that I can’t take a big amount which I won’t be able to repay in the future. This is why I have hired Jake Brown, a financial assistant, who will help me decided how much money to borrow and will handle all my financial statements. With him on my side I feel more confident with my decision.
1. Fabozzi, Frank (1998). Bank Loans: Secondary Market and Portfolio Management.
2. Wesson, Patricia (2006). Secrets Lenders Never Told You: Get Your Business Loan Approved
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