, PLEASE USE THIS DOCUMENT AS A GUIDE ONLY
QUESTION 1:
1. Using real-world examples, critically explain how you would fund your business. Justify why
you would select certain financing options rather than alternative ones.
Funding a Small Business: A Critical Analysis of Financing Options
Securing appropriate funding is a critical determinant of entrepreneurial success. As a new
entrepreneur, I would need to carefully evaluate various financing sources and select those that align
with my business characteristics, growth potential, and risk tolerance.
Personal Savings as Foundational Capital
I would commence my funding journey with personal savings as the foundational source of capital.
According to Longenecker et al. (2020, p. 306), personal savings is "by far the most common source
of equity financing used in starting a new business." This approach demonstrates commitment to
potential investors and lenders, as they typically require entrepreneurs to have "skin in the game"
before extending credit .
The importance of personal investment cannot be overstated. Longenecker et al. (2020, p. 306)
emphasise that "a banker—or anyone else for that matter—is unlikely to loan a venture money if the
entrepreneur does not have his or her own money at risk." I would therefore contribute 30-40% of
the required startup capital from personal savings, establishing credibility with external financiers
and retaining greater ownership control.
Bank Financing: Debt with Discipline
For the remaining capital requirements, I would pursue a combination of debt and equity financing.
Bank financing would be my preferred debt option for several strategic reasons. Longenecker et al.
(2020, p. 308) note that "commercial banks are the primary providers of debt capital to small
companies." I would specifically seek a term loan rather than a line of credit, as this aligns with my
long-term asset acquisition needs.
The justification for selecting bank financing over alternative debt sources lies in several factors.
Firstly, bank loans typically offer lower interest rates compared to credit cards or alternative lenders
(MNE3701, Study Guide, p. 40). Secondly, bank financing preserves ownership control, unlike
equity financing which dilutes shareholding (MNE3701, Study Guide, p. 40). Thirdly, as
Longenecker et al. (2020, p. 300) explain, "tangible assets serve as great collateral when a firm is
requesting a bank loan," making this option viable for businesses with equipment or property assets.
However, I would be mindful of the tradeoffs. Longenecker et al. (2020, p. 304) caution that "debt is
risky. If the firm fails to earn profits, creditors will still insist on having their money repaid."
Therefore, I would structure the loan with manageable repayment terms, maintaining a debt ratio
below 50% to ensure financial sustainability (MNE3701, Study Guide, p. 40).
Private Equity Investors: Strategic Partnership
While bank financing addresses short-to-medium term needs, I would consider private equity
investors for growth capital and strategic expertise. Longenecker et al. (2020, p. 315) describe
business angels as "private individuals who invest in early-stage companies" and note that "private
equity markets have been the fastest growing source of financing for entrepreneurial ventures."
QUESTION 1:
1. Using real-world examples, critically explain how you would fund your business. Justify why
you would select certain financing options rather than alternative ones.
Funding a Small Business: A Critical Analysis of Financing Options
Securing appropriate funding is a critical determinant of entrepreneurial success. As a new
entrepreneur, I would need to carefully evaluate various financing sources and select those that align
with my business characteristics, growth potential, and risk tolerance.
Personal Savings as Foundational Capital
I would commence my funding journey with personal savings as the foundational source of capital.
According to Longenecker et al. (2020, p. 306), personal savings is "by far the most common source
of equity financing used in starting a new business." This approach demonstrates commitment to
potential investors and lenders, as they typically require entrepreneurs to have "skin in the game"
before extending credit .
The importance of personal investment cannot be overstated. Longenecker et al. (2020, p. 306)
emphasise that "a banker—or anyone else for that matter—is unlikely to loan a venture money if the
entrepreneur does not have his or her own money at risk." I would therefore contribute 30-40% of
the required startup capital from personal savings, establishing credibility with external financiers
and retaining greater ownership control.
Bank Financing: Debt with Discipline
For the remaining capital requirements, I would pursue a combination of debt and equity financing.
Bank financing would be my preferred debt option for several strategic reasons. Longenecker et al.
(2020, p. 308) note that "commercial banks are the primary providers of debt capital to small
companies." I would specifically seek a term loan rather than a line of credit, as this aligns with my
long-term asset acquisition needs.
The justification for selecting bank financing over alternative debt sources lies in several factors.
Firstly, bank loans typically offer lower interest rates compared to credit cards or alternative lenders
(MNE3701, Study Guide, p. 40). Secondly, bank financing preserves ownership control, unlike
equity financing which dilutes shareholding (MNE3701, Study Guide, p. 40). Thirdly, as
Longenecker et al. (2020, p. 300) explain, "tangible assets serve as great collateral when a firm is
requesting a bank loan," making this option viable for businesses with equipment or property assets.
However, I would be mindful of the tradeoffs. Longenecker et al. (2020, p. 304) caution that "debt is
risky. If the firm fails to earn profits, creditors will still insist on having their money repaid."
Therefore, I would structure the loan with manageable repayment terms, maintaining a debt ratio
below 50% to ensure financial sustainability (MNE3701, Study Guide, p. 40).
Private Equity Investors: Strategic Partnership
While bank financing addresses short-to-medium term needs, I would consider private equity
investors for growth capital and strategic expertise. Longenecker et al. (2020, p. 315) describe
business angels as "private individuals who invest in early-stage companies" and note that "private
equity markets have been the fastest growing source of financing for entrepreneurial ventures."
