custom_stitch - Introduction A small business is a business...

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Introduction A small business is a business that is independently owned and operated, with a small number of employees (in USA less than 100). It has and relatively low volume of sales. They are generally privately owned corporations, partnerships, or sole proprietorships. Small business financing is very critical component to its success. Financing should be done in a way that properly balances risk and the profitability of the business. Small business financing (long term and short term) constructs capital structure of the business. There are several sources of financing available for small business. Main sources of financing are: 1. Boot-strap financing 2. Debt financing 3. Angel Investors 4. Equity Financing 5. Small Business Investment Companies (SBICs) 6. Venture Capital 7. Merger and Partnerships 8. Going public Each method of financing has its pros and cons. One method which is suitable for some particular business may not be the right choice for some other business. When owner is not willing to dilute equity and it has no means for boot-strap financing, debt financing is the only option left for the business. Debt financing is preferred when owner is sure of the success of its business and he
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knows that he will be able to arrange the financing required for the business. He is also sure that he will be able to manage the business. A small business with poor past record or no past record face difficulties in arranging loan from banks. Bankers are conservative in lending. Owner has to present his case strongly and convincingly before the banker to get loan. A good business plan or loan proposal is required to impress the lender. Other than banks too there are many options for debt financing. One has to choose carefully which option is suitable for his business. A lower interest rate will always improve the cash flow. Tax shield on interest paid is one more reason why businesses prefer debt financing. But business owner should always be aware that with debt financing risk of business increases. With high debt business will find it difficult to arrange further financing and cost of debt will also go high. Also, owner should know what type of loan he needs- Short term loan (to finance working capital) or Long term loan to finance major business expenses such as purchasing real estate and facilities, construction, equipments and machineries, furniture etc. Where would you suggest Andy look for the financing he needs for Custom Stitches? Main advantage of debt financing is, lenders do not interfere in the management of the business.
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This note was uploaded on 01/05/2012 for the course 101 melissa jo taught by Professor Acc101 during the Spring '11 term at Aarhus Universitet.

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custom_stitch - Introduction A small business is a business...

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