The paper discusses Rhoda’s case is a young entrepreneur who recently launched a retail business store specializing in the sale of Musical instruments and both Hand books and musical books. Rhoda plans to expand the business by first a market place between musical students and their instructors. With this plan having been written, Rhoda has approached two different banks that have turned his applications down. Now she has decided to raise capital through equity sources of Business Finance.
Introduction Equity finance or capital is a method of capital collection that is called a share capital. This is because the share capital invested in the business for a medium to long term is always in return for a share of the ownership and sometimes as an element of control of the company. (GAO, 2000) As compared to lenders equity finance investors mostly have no right to the entity interest or to be paid in one particular day.
They get their return inform of dividend payments which depends son the growth and profitability of the business. This actually makes it to be referred to as risk Capital. (GAO, 2000) There are different types of Equity for business; we have venture equity capital which is used in high growth business that is designed for floating in the stock exchange markets. There is also business angle equity which is designed to offer capital to businesses that are still in their starting stages (Edwards, 2005).
In this business financing plan one should be prepared to; share her business and sometimes control of her business with the financier, they must also be prepared to have other investors who may be expected to monitor the progress of the company while others may seeks to be involved in the important entity decisions making and to analyze the industry experience and knowledge that her management have, this will help her to choose the correct equity partner who will help finance her business.
(Bartlet, 1995) There are five different ways of raising equity capital; the first source of capital is getting money from relatives, friends and close associates. This source can be considered as begging and it ends up to about 30 % source of capital for most entrepreneurs. Before one starts using this source of Capital he should consider drawing up a business contract for this source.
It is also advisable that while approaching both family members and friends to just talk to them about their business investment as one may approach let us say a bank. Tell them about how much money they can make, not about how much you need their help. And make sure that you keep to your end of the agreement (Edward, 2005) The next source of capital is the use ones savings or the use of credit cards. It is the most common way for young upcoming entrepreneurs to be raising the needed capital.
However before choosing this equity one needs to talk to their financial advisor and forecasts at the long –term consequences of using ones savings, life insurance and credit cards to raise capital. If you do end up financing your project using credit cards, make sure that you shop around first, and find the card that will offer you the best rate and gives you the most “bang” for your buck. (Edward, 2005) The other source of Capital is the venture capital and angels investor.
This is the most critical method of raising cash and therefore before one chooses it the company must be capable of meeting the following conditions; must have a good track record- this is because most venture capitalists don’t invest in start up companies but in the expansion of already existing company, the company must also be having the potential to expand in the next five to seven years- this is because people don’t people only invest in your company for a good return of their capital and not out of good heart and lastly your company must have a good percentage of the market must stand to increase the market percentage within 12 to 18 months. ( Mernet and others, 1967) The other source of equity capital is the use of potential or current employees.
Many new companies mostly invite their potential and current employees to become investors with them. This is a good method since many employees will be committed to the course of the business and will even be wiling to get a below market wage at the beginning. The advantage of this apart from just the cash funding the business ma y also get good investors with a lot of managerial and other skills for the business. (GAO,2000) The last source of equity capital is taking your company public. Although security laws in the U. S. have made it easier for companies to go public, and offer stock as a way to raise needed funds, this is still probably the most risky choice.
It is usually not a recommended option for very new or very small companies. Because of the number of legal issues involved, consulting with a knowledgeable attorney beforehand is vital. This would be a good way of getting large equity capital. (GAO,2000) These sources have booth their pros and cons. Some of the pros are that the funding is committed to the development of the intended business projects and investors only realize their investment if the business is doing well, the investors will also have a vested interest in your business and therefore this will spur its growth and profitability and lastly most investors are always prepared in providing follow up funding as the entity grow. (Edward, 2005)
The cons for this that might not have been discussed up there are that raising equity finance is demanding, costly and time-consuming. Your business may suffer as you devote time to the deal and also some potential investors will seek background information on you and your business – they will closely scrutinize past results and forecasts and will probe the management team. However, many businesses find this discipline useful regardless of any funding. (Edward, 2005) Another disadvantage is that the business will be subjected to t varying degree of influence towards the major decision makings and management of the business and the owner’s contribution will be diluted into the business. (Edwards, 2005)
With the nature of Rhoda’s business and her experience she should contact a n attorney for legal advice and look for equity Capital either through the use of Current or prospective employees or through getting from Family members friends and relatives. This is because she does not qualify for the other sources of Capital discussed
Bartlet Joseph (1995). Equity Finance: Venture Capital Buyouts investment. Aspen Publishers Edward Anthony, (2005). Equity Capital and Small Business. University Of Michigan Press GAO,(2000),. Small Business Effort To Facilitate Equity Capital Formation. Dianne Publishers Menert A. J, Howe Martin and Newbound G. D. , (1967). Equity Issues and London Capital Market Dianne Publishers