Sources of Business Funding
Funding is an important resource in starting or growing a business. Finance is an important aspect of a business, vital for all stages of development within the business lifecycle (Evertsen and Mulvaney 2010). While a business may continually use internal sources to fund its expansion and start-up process, it may also require external sources and support for funding of crucial business activities as well as to exploit new business opportunities. Although numerous ways exist for funding to businesses, not all sources are similar. On the face value, some sources may look viable and as the best options for funding. However, a scrutiny of these sources may present problems to the enterprise. The different sources customarily seek different rates in return on the loans or investment. Moreover, these sources additionally have various levels of complexity when dealing with them. This is in addition to innumerable levels of comfort that the sources offer as well as the advantages and disadvantages that each comes with. Given the length of relationship that will develop between the business and the source of funding, it is important for the business to choose wisely the source of funding that it seeks for its business operations (Abrams 2010). Choosing the right funding source is inportant as it saves the business time and grief in dealing with the funding source, as well as in running the business.
Most business funding falls under two categories: equity and debt. Equity largely means selling off part of the business to an investor for funds to invest in the business or some item of value to the business. Debt, on the other hand, means getting an advance in money from a lender, for which the business must repay with an agreed upon interest on the investment. The money lent is repaid over time, with the calculated repayment amounts mostly factored in the monthly premiums. Therefore, the paper will review some of the sources of business funding, enumerating their advantages and disadvantages. The review will focus on a single source of funding, relating it to a given scenario. Finally, the paper will also list and evaluate some of the contributions made by various sources of income generation available for chain restaurants.
1.Sources of Funding
Sources of funding are ways in which businesses can acquire necessary funds for the expansion of business activities or purchase of resources required for the smooth running of the business. There are numerous sources available to businesses, subject to the worth of the business and the volume of funds the business requires. Traditionally, businesses have looked into the owner’s savings or credit advanced by banks. Economic times of the recent past have however made it difficult for banks to advance credit, especially to small and medium enterprises (SMEs). On the same breath, many savings have been spread thin, and business owners no longer have enough in personal savings to jumpstart their businesses. It is under such circumstances therefore that businesses must look for alternative means of securing funding (Varriale 2013).
Creativity in sourcing funds for business is important. Just as creativity helps a business to move forward and gain competitive advantage, creativity can also be instrumental in helping businesses source funds. In sourcing funds, therefore, business can use both the traditional and more innovative means of acquiring the funds.
Banks are the oldest sources of business funding. Many consider banks as the showroom for debt financing. Banks offer a broad range of credit facilities, giving customers the option of short-term, mid or long-terms repayment periods on the credit facilities offered (Rao 2010). Banks offer either business or personal loans, all of which have a prearranged repayment period, which the customer must adhere to. The business or consumer, therefore, is under the debt obligation from the bank, to the point where the funds advanced are fully paid to the bank. In giving loans, particularly business loans, banks require guarantees through assets, as well as individual assurance and surety from individuals with more than 20% of shares in the business (Alberta Tourism, Parks and Recreation 2012).
The purpose of the collateral is to assess the proprietor’s credit worthiness for the risk undertaken by the bank in fronting the credit. Therefore, business loans have rules that are more stringent. Most business owners, therefore, opt for personal loans to acquire funds for the business. With proper repayment and deposit histories, individuals can easily secure funds from banks. These loans are additionally easy to process, require less paperwork, and have a shorter window for approval (Alberta Tourism, Parks and Recreation 2012).
Among the advantages of getting bank loans is the fact that banks have the capacity to finance all the asset needs required by the organization, subject to the organization’s/owner’s credit worthiness. Bank funding covers working capital, equipment, and real estate, making it one of the most flexible sources of finance for a business (Rao 2010). Banks’ flexibility is also visible through the option of clearing the debt earlier than the agreed period and therefore terminating or reaching a new agreement. Venture capitals and other institutions may not be as flexible as banks in offering such an option to its consumers (Rao 2010).
Businesses have the capacity to access funds that they may not access through bank loans. Therefore, businesses easily expand and purchase requisite equipment before it has the necessary funds for the purchases. Moreover, some of the loans, such as personal loans have flexible repayment periods and premiums, allowing the customer adequate preparation for the payments (Laura 2010). Banks only require collateral on personal assets and not the control of the business or equity as is the case of venture capitals and selling equity respectively. This way, the owner retains control and is at liberty to steer the business towards the envisioned route.
Banks, however, charge interest on the loans advanced to consumers. Some of these loans may have high interest rates, which only work to drain the business funds. Such funds could easily be plowed back into the business for expansion and improvement of service delivery (Varriale 2013). Banks can additionally inconvenience businesses by asking for an immediate refund of their money at any sign of trouble in the industry. Moreover, with banks requiring collateral, it is easy for them to repossess the items on the failure of payment of loans installments by the entrepreneur.
Family and Friends
Family and friends offer one of the simplest ways of sourcing for funds. Giving what is also known as love money, family and friends can easily lend a business owner funds for the purchase or expansion of a business venture (Alberta Tourism, Parks and Recreation 2012). With a well-planned business strategy, family and friends can give more than just funds; some can offer free labor and consultancy on ways of growing the business. Moreover, family and friends also offer moral support, especially when things are not right with the business.
For Rao (2010), family and friends do not necessarily require collateral in an asset before lending the money. Most would lend the money out of the goodness of their hearts, and although some may require the money back, this will be with little or no interest at all. Additionally, family and friends can easily agree to sell back the interest to the owner for a small return (Rao 2010).
Families can, however, prove problematic, as some may want to control shares in the business given their contribution. Moreover, a person may very well alienate family members and friends in cases where the business does not perform as expected or fails. Even worse is the difficulty in dealing with friends and family in case of wrongdoing at the business for the fear of initiating a conflict.
Venture capital refers to money from firms, which invest in companies in the early stages of high-growth companies. Venture capitalists make this investment with the agreement of getting a portion of the company. Most of the venture capitalists also require control of the enterprise. They are largely interested in businesses with solid track records and expected to have rapid growth in the future.
Venture capitalists mostly offer huge amounts of money in the tune of $1 million and above. Additionally, they offer advice and managerial input in the business, which are instrumental for the success of the business. Furthermore, investment by one venture capitalist mostly opens doors for others interested in the business.
Most venture capitalists are biased to businesses with the potential of about 20 percent annually. This locks out smaller businesses that do not make such in revenue. Besides, venture capitalists do not only give loans, but also wants the business equity. Apart from ownership, most venture capitalist will also push for managerial input, some of which go against the very foundation of the business at its inception. Getting venture capitalist is also not only difficult but also tiresome and grueling, given that the venture capitalists are interested in extraordinary growth potential, talents and proprietary products and services (Rao 2010).
These are individuals with money and looking for investment opportunities capable of giving them better returns than traditional investment avenues. Most angels give sums less than £100,000 and mostly invest within their home locality (Alberta Tourism, Parks, and Recreation 2012).Angels would either require partial ownership of the business or repayment with interest for the seed in the company. Control and there payment period may also be part of the agreement with the angel.
An advantage of working with an angel is the wealth of knowledge, advice, and network of friends (other angels) that he/she brings to the business. Most of the times, angels are seasoned businesspersons, who can, therefore, offer sound advice in the steering of the business (Clifford 2012). The money invested by angels requires no collateral, therefore easing the pressure for repayment, as is the case with bank loans.
Some angels, however, demand control over the business. Others also demand equity, which, therefore, robs the owner of total control and ownership of the business as it may have been their desire. Some angels may not offer much in follow-up or advice to their investment in the company. They only therefore wait for a return on their investment without necessarily working for it.
These are funds largely available for non-profit organizations. Grants are funds offered by a government or non-governmental institution. The funds provided through grants are usually trained towards the development of products or services for public benefit.
Grants do not usually require funding as they are geared towards the development of products or services for government or public use. Moreover, grant recipients do not need to relinquish their vision for the business, as only monitoring and reporting will be requiredof the business.
Grants are largely hard to come by. Most of them are not given to for profit organizations, making them elusive for businesses. Even more is that grants are usually never given to start-ups, most of which require such amounts for their progress.
These are companies that offer loans on businesses regardless of the businesses or individuals’ spotty credit history. Finance companies thus, take higher risk commercial loans than banks.
Finance companies provide businesses with a source of funding, particularly businesses with high loan ceiling. Given their flexibility, finance companies can raise a business’ loan ceiling, especially those with high growth, credit unworthy, and those with a high debt-to-worth ratio, but with a strong cash flow.
With the greater risk however, finance companies charge far higher fees than banks. This decreases a business’ profit as all the gains go into repayment of the high rates and fees.
Personal savings are funds set aside by a business owner for personal use. The savings may come from business profits, salary, or other sources. Given that most lenders will not fund the business needs wholly, personal savings come in handy in starting a business or for the purchase of equipment, payment of rates or expansion.
By using personal savings, the control and ownership of the business remain with the owner. Further, the owner gets to enjoy all the profits from the business. Using personal savings additionally allow the owner to curve the path and direction the organization will take without reporting to anyone.
There is the risk of failure of the business and therefore losing all the funds (savings) invested in the business. Additionally, as the only decision maker, it is easy for the business to fail especially if the owner has no knowledge in managing a business. Therefore, while personal savings accord the owner freedom in making decisions, they also deny her/him the chance of getting counsel on the best decision for the business.
This is selling part of the business’ ownership to investors. The investors, therefore, provide the business with funds or other valuable things for part ownership of the business. The money invested from the owner and the investors are customarily unsecured and have no registered claim over any of the business’ assets (Alberta Tourism, Parks, and Recreation 2012). Higher business equity increases the business’ advantage allowing it to attract more investors and other sources of funding.
Selling equity does not warrant payment. The business can, therefore, operate without the worry for repayment and accumulating interests as in the case of bank loans. Equity investors mostly bring knowledge, experience, and expertise to the business. According to Evertsen and Mulvaney (2010), “Research indicates that enterprises availing of equity financing tend to grow faster and turn more profits when compared to competitors” (p. 9).
Selling of equity nevertheless, diminishes the owner’s control as more investors and shareholders enter the business. Most of these come with their ideas of how the business should run, some of which are contrary to the vision of the owner of the business (Evertsen and Mulvaney 2010). Furthermore, the owner has to share the proceeds from the business by paying dividends to the investors. Payment of the dividends consequently becomes an obligation the owner must satisfy. There are also risks of losing the business to the investors, as was the case of Steve Jobs with Apple in 1985.
Source of Funding For Machinery
The cost of machinery for the scenario is £50,000. The best source for this machinery, therefore, is an angel. Working within his/her networks, the manager should be able to source for an angel willing to invest £50,000. Even more is that the cost of the machinery falls squarely within the range of many angel investors (below £100,000). Moreover, angels are largelywell-seasoned individuals and, therefore, have a wider range of knowledge and expertise in the business in question (Clifford 2012). While it may be possible that some angels do indeed demand for control of the business, the owner can reach an understanding with the angel over the level of control. This way, the owner can continue to pursue his/her vision of the business under the tutelage of the angel.
2. Methods of Income Generation by Large Restaurant Chain (McDonalds)
Chain restaurants are restaurants with stores at different location with similar names, selling same products and using standard corporate policies. The operations can be local, regional, or international. The bulk of the income for the chains is usually the fully owned chain-operated stores. Through these stores, the restaurants make sales, which contribute to their bottom lines. McDonald’s is one of the largest chain restaurants with a diversified source of income.
McDonald’s leases out its chains in what is known as franchising. Franchising forms the largest share of McDonald’s revenue source. A single franchisee pays McDonald’s $200,000, annually in franchise fee (Paton 2013). The company has more than 1000 franchisees across the world, translating to about $200 million in franchise fees. This is in addition to the rent charged on the restaurant’s real estate investment, where some of the franchises operate.
Royalties further mark an additional source of income for chain restaurants. Companies using restaurants names in customer service traditionally pay royalties to these chains. Most chains have additionally invested in other firms from where they share profits and dividends. Such income sources are instrumental in business expansion, payment of wages as well as in making improvements in addition to aiding acquisitions.
Business can access funding for expansion and purchase of equipment through a variety of sources. Each of these sources offers a promise to the business and some limitations. Small businesses have a limited number of funding sources, perhaps due to their minimal returns and their high risk. Although banks, venture capitals, angels, selling of equity, and finance companies offer alternative means of funding, they all have some risks involved. Banks, while they do not pursue control of the business, require payment of interest on the loans advanced. The rest of the sources, apart from savings, all clamor for control of the business. It is thus important for the business owner to wisely choose the source of funding, especially for small businesses.
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Evertsen, J. and Mulvaney, P. 2010. Sources of Business Funding for Start-ups. Dublin: Synergy Center
Patton, L., 2013. McDonald’s Franchisees Rebel as Chain Raises Store Fees, Bloomberg Business. (Online) (Updated 6 Aug 2013) Available at <http://www.bloomberg.com/news/articles/2013-08-06/mcdonald-s-franchisees-go-rogue-with-meetings>( Accessed 30 June 2015)
Rao, D. 2010. “The 12 Best Sources of Business Financing.” Forbes. (Online)(Updated 7 June 2010) Available at file:///C:/Users/user/AppData/Local/Temp/The%2012%20Best%20Sources%20Of%20Business%20Financing%20-%20Forbes.html (Accessed 30 June 2015)