If you are hoping to start a new business, the first thing you will need to figure out is where you will get your financing from. Without a reliable source of financing at your disposal, it will not matter if your idea for a new business is the greatest in the world—you won’t even be able to turn your lights on. Once you have secured financing, you will be able to focus on the more creative components of your business and move closer to turning your dreams into a reality. However, before you go applying for financing everywhere it happens to be available, ask yourself, “what kind of financing is best for my business?” Generally speaking, all business financing options fall into one of two categories. With debt financing, your business borrows from a lender and plans to pay that amount back (plus interest) over time. With equity financing, on the other hand, you are selling partial ownership of your business. While this type of financing does not need to be “paid back” in the future, you do lose some control of your business and you may also lose a portion of your profits. Both debt and equity financing have pros and cons for all new business owners. The choice that is right for you will be very specific to your business. In this article, we will briefly discuss seven factors to consider when choosing between debt and equity financing options.
1. Long-Term Goals As the owner of your new business, it will be critical for you to think about what you actually hope to achieve in the long-run. What is the purpose of starting your business? Where do you hope for your business to be in ten years? Twenty years? By answering these questions, it will be easier for you to decide how financially entrenched in your business you will actually be. Though you don’t need to come up with a future “exit strategy” this very minute, it is certainly a good thing to think about.
2. Available Interest Rates Naturally, the opportunity cost of choosing equity over debt finance will be largely determined by how much you will actually need to pay to borrow money. If your business has access to low-interest rates or specialty loans (such as an SBA loan), the total cost of borrowing will be relatively lower. In order to make sure you are getting competitive quotes from potential lenders, it will be a good idea to compare multiple options before making any final decisions. Working to improve your business’ current credit score can also make a major difference.
3. The Need for Control By surrendering partial ownership of your business you are, to a certain extent, giving up control. In order to make sure they can still outvote all other stakeholders, many business owners will maintain 51 percent ownership of the business while selling the remaining 49 percent. If having total or significant control of your business is something that’s important to you, be sure to limit the amount of equity you end up distributing.
4. Borrowing Requirements There are many different things lenders will look at when deciding whether to issue a loan. In addition to a general financial background check, lenders will also want to see some hard numbers on paper. The factors they may look at include things such as your debt-to-equity ratios, your fixed monthly expenses, your overall business plan, and various others. These requirements can often be rather rigid, which is why your business needs to plan its financing strategy in advance.
5. Current Business Structure Another variable that will impact the opportunity cost of borrowing (or issuing equity) is your business structure. If your business is already formally structured as a partnership, for example, this may complicate the process of selling equity. Additionally, if you hope to secure your equity finance via public means—such as selling stocks on the open market—you will need to formally declare your business to be a public corporation. Though your business structure is something that can (and likely should) be changed in the future, there is no doubt that the preexisting structure will have a major impact on your short-term financing decisions.
6. Future Repayment Terms While many business loans are simple, flat loans with a fixed interest rate, there are many loans with repayment terms that are notably more complicated. For example, some loans will not require any repayment for several years down the loan. When this is the case, you will need to calculate both the average total interest rate as well as the time value of money. If you are hoping to borrow from a single venture capitalist or angel investor, they may be able to dictate additional terms that are not found in traditional bank loans. Sometimes, these investors will offer a complex mix of debt and equity financing for new businesses.
Property: the individual or company that possesses the instrument is also considered its owner. Order instruments, e.g. checks, must be endorsed for transfer of property.
Title: the person that receives title of the instrument is called a transferee and is the holder in due course.
Rights: the transferee can take legal action to claim the honoring of the instrument.
Prompt payment: the due holder can anticipate prompt payment because dishonoring the instrument (not paying it) results in the "ruin of credit" of all parties involved in the instrument.
Monetary value: instruments carry a specific monetary value and must be paid in money.
Total Cost is the cost that is fixed and does not vary directly with the level of output. According to this question typesetting, printing, editing, reviews, promotion, and advertising are fixed costs. The total fixed cost here is $100000.
Total Variable Cost is the costs that vary directly with the level of output. Variable costs are incurred on variable factors. The Total Variable Cost here is $49000.
Marginal cost is addition to the total cost when one more unit of output is produced.
<u>EQUATIONS
</u>
TC = 100000 + 4.9Q
ATC = 100000 + 4.9Q / Q
AVQ = 4.9Q / Q
MC = Change in Total Cost / Change in Quantity = 4.9
Answer: the corrcet answer is c. The measurement focus on all economic resources is more consistent with the GASB’s objectives that financial reporting should provide information to determine whether current-year revenues were sufficient to pay for current-year services.
Explanation:
The GASB stands for the Governmental Accounting Standards Board (GASB) and is the source of generally accepted accounting principles (GAAP) used by state and local governments in the United States. As with most of the entities involved in creating GAAP in the United States, it is a private, non-governmental organization. The answer is clear above; it only needed some clarification with the acronyms.
<em>(To recognize the salaries and wages payable at year-end)</em>
Explanation:
Merando Industries employs a 5-day workweek - this means $41,760 normal weekly wages can be divided by 5 to arrive at the daily workweek wages, which is $41,760 / 5 = $8,352.
If the fiscal year-end is a Wednesday, the company has to recognize a salaries and wages payable of $25,056 due to the following:
the workweek remains 2 weekdays to complete
the company pays at the completion of the 5-day workweek
there is no need to recognize the remaining 2 days next year as salaries and wages payable since the employer may not have control over the employees - they may decide the exit the company
So, the amount to be recognized will be $8,352 x 3 = $25,056.
This question has some irregularities. The correct question should be :
Elinore is asked to invest $4,900 in a friend's business with the promise that the friend will repay $5,390 in one year's time. Elinore finds her best alternative to this investment, with similar risk, is one that will pay her $ 5,341 in one year's time. U.S. securities of similar term offer a rate of return of 7%. What is the opportunity cost of capital in this case?
