Financial Accounting Essay

3484 words - 14 pages

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Financial Accounting
Scenario 1
Sources of Finance
There are a number of equity sources of finance. They include help from family and friends, public stock sale, venture capital, and funds from angel investors. A businessperson can get money from family to start up a business. The advantage with obtaining funds from family and friends is that they may be lenient with repayment terms (Leach and Ronald 34). They might also offer low interest rates and longer repayment duration. The problem is friends and family members might not have the amount of money one needs. This can make it hard for one to raise the needed capital. A businessperson can raise ...view middle of the document...

The requirements needed to be fulfilled before one is offered the capital are many and many businesspeople might not be able to meet them.
Venture capital companies also normally invest in industries they have good knowledge about. This makes it hard for businesspeople who are venturing in new industries unknown to these companies to get money from them. Just like venture capital companies, angel investors are private investors who invest their money into starting businesses (Charles 35). Apart from investing money into the business, they also offer their expertise on how to run the business. In return for investing into a business, angel investors take ownership of part of the business. The disadvantage with angel investors is that they do not make huge investments and can therefore not help a business that requires huge capital. The most secure source of debt financing is funds from family and friends. This is because family and friends are lenient and are subject to adjustment of the terms of the agreement depending on the circumstances.
Evaluation of Sources of Finance
Renting out the mansion will enable Lisa to raise part of the capital as well as retain her mansion. This will enable her to avoid losing her property in case the business fails. However, renting out the mansion will not raise enough capital to start the business. This is because renting the mansion for five years will raise 300,000 pounds only. Selling the mansion for 15 million pounds will provide Lisa with a substantial amount of cash that will help her start the business (Stickney 51). However, she risks losing everything should the business fail.
Bringing a partner on board will allow Lisa to raise the needed capital as well as retain her mansion. Apart from bringing funds to the business, the partner would also be involved in the management of the business and offer valuable advice that can help in the growth of the business. However, she will be forced to lose control of the business because decision-making will also involve the partner. She will also have to share the profit with the partners. However, bringing a partner on board is the most appropriate source of capital because it will offer security (Rajasekaran and Lalitha 61). This is because if the business fails, she will not have to pay the money invested into the business by the partner. In addition, she can gain independence by dissolving the partnership. Conversely, she can enter into a short-term partnership to help her stabilize the business. After the end of the term, Lisa can gain full ownership of the business. This will help her retain her mansion as well as gain enough capital to start the business.
Cost of the Sources of Finance

Renting the mansion for 5000 pounds a month for 5 years will total to 5×12×5000

=300,000 pounds

Bringing a partner on board will bring 30% of capital. This will be equivalent to 30% of 50 million pounds

=15 million pounds. Bringing a partner to the business...

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