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Leya [2.2K]
3 years ago
5

Why is 'time' a sensitive factor to consider when deciding whether to choose debt or quity financing?

Business
1 answer:
anzhelika [568]3 years ago
8 0
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.

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videoconferencing

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1 year ago
Match the expense revenues with expenses recognition approaches with the most appropriate accounting event.
Zigmanuir [339]

Answer:

Cause-and-effect relationship  - Cost of goods sold

With the Cause and effect relationship, costs are linked to the revenue that they were incurred for to create. Cost of goods would therefore be linked to revenue.

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Without regard to related revenue in the period incurred - Advertising expenditures

The advertising costs will be incurred when spent and not when the benefits are accrued.

4 0
3 years ago
a(n) to pay the debts or settle the wrongdoings of another if he or she does not make settlement personally is not enforceable u
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A guarantee, or promise, to settle another person's debts or hold them accountable for their wrongdoings if they fail to do so personally, is not enforceable unless it is in <u>writing</u>.

<h3>What is a guarantee promise?</h3>

An undertaking or pledge from a guarantor to a guarantee is what is known as a guarantee. A guarantee can be viewed as a security for the guarantor's primary or principal performance obligation.

Guaranty Agreement: A two-party contract wherein the first party commits to carrying out its obligations in the event that the other party is unable to do so. A guarantor, unlike a surety, is only obligated to carry out when the obligee has exhausted all reasonable and legal avenues to compel the principal to execute.

<h3>Is a debt payment commitment enforceable?</h3>

Even if no fresh consideration is provided, a commitment to pay a debt that has reached its statute of limitations is nonetheless enforceable. The promise is regarded as a new promise in such circumstances, and only the provisions of the new promise are enforceable.

<h3>What does it mean to vow to be responsible for another's financial failure or default?</h3>

The surety is a party who guarantees another party's payment of one party's debt. A surety is a company or someone who agrees to pay the debt in the event that the debtor policy is in default or is unable to make the payments. The surety, also known as the guarantor, is the party that backs.

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8 0
1 year ago
Alfred Home Construction is considering the purchase of five dumpsters and the transport truck to store and transfer constructio
Neporo4naja [7]

Answer:

If the total number of days per year is 1,419 or less, then the company should obtain the services from the city. But if the total number of days per year is 1,420 or more, then the company should purchase the equipment.

Explanation:

alternative 1:

initial outlay = $125,000

useful life 8 years

depreciation per year = ($125,000 - $5,000) / 8 = $15,000

costs:

$40 per day

maintenance $2,000 per year

total annual costs = $40x + $2,000

alternative 2:

$125 x 45 sites = $5,625

$20x

total annual costs = $5,625 + $20x

how large does x need to be in order for alternative 1 to be better using a 12% discount rate

cash flows

year 0 = ($125,000)

year 1 = $40x + $2,000 - $5,625 - $20x = $20x - $3,625  

year 2 = $20x - $3,625

year 3 = $20x - $3,625

year 4 = $20x - $3,625

year 5 = $20x - $3,625

year 6 = $20x - $3,625

year 7 = $20x - $3,625

year 8 = $20x - $3,625 + $5,000 = $20x + $1,375

I used the present value of an annuity formula, to determine the value of cash flow:

the PV annuity factor for 12% and 7 periods is 4.5638, so:

24,756.20 x 4.5638 = $112,982

$29,756.20 / (1.12⁸) = $12,018

total = $125,000

$20x - $3,625 = 24,756.20

$20x = $28,381.20

x = $28,381.20 / $20 = 1,419.06 days (including all 45 sites)

That means that if the total number of days per year is 1,419 or less, then the company should obtain the services from the city. But if the total number of days per year is 1,420 or more, then the company should purchase the equipment.

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3 years ago
A stock has a beta of 1.08, the expected return on the market is 10.2 percent, and the risk-free rate is 4.85 percent.
Advocard [28]

Answer:

im sorry

Explanation:

8 0
3 years ago
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