Essay on General Internal and External Sources of Funding

Sources of financing for businesses can come from various sources. Banks are perhaps the most common sources of lending because they are well established and have the necessary capital to lend to many entities. Also, entrepreneurs can use their savings to create a business. Personal savings are ideal because they come from ones pocket, interest-free, and with little commitments. If personal savings are not enough, one can borrow from friends or family. Such loans are usually flexible and may not attract interest rates since some are considered favors. Alternatively, businesspersons may choose to seek loans from peer to peer lenders. These facilities link lenders with borrowers and eliminate the need for banks (Carey 2017).

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Further, one can opt to lease equipment rather than buy. Such a method of financing frees up capital and allows one to use equipment using installments rather than paying the full price. Aside from that, one can decide to use crowdfunding techniques. These methods can allow clients to pre-purchase a product until the funds reach a critical number needed to finance a company. Also, the government can provide businesses with grants especially if the business has significant social benefits. Lastly, one can secure loans from angel investors or venture capitalists. These investors usually have varied needs and only invest in companies that suit their investment goals (Downing 2012; Miller 2014).

Possible Sources of Funding for the Ice Cream Venture

One of the potential sources of financing for the ice cream business is bootstrapping. Calopa et al. (2014) describe it as a way of converting human capital into finances. Bootstrapping involves the use of a limited amount of resources to start a business. It ensures that the entrepreneur does not borrow any money and reinvests any profits made back into their enterprise. (Calopa et al. 2014). Additionally, a business could choose to use equity financing. Using equity to finance a business involves ceding some ownership in exchange for capital investments. Equity financing can be sourced from friends or investors who are not risk averse (Abdulsaleh and Worthington 2013).

Another source of funding is debt financing. At times one may find it hard to generate finances using personal savings or equity. As noted by Abdulsaleh and Worthington (2013), small enterprises can either use debt or equity to fund operations. Debt financing includes the use of bank loans and financing from other similar financial facilities. Lastly, the ice cream business can be financed using Microloans from the Small Business Administration (SBA). These loans are usually capped at $50,000 while the average amount given is $13,000. These figures are in line with the requirements of the ice cream sales venture (Longenecker et al. 2017).

According to Calopa et al. (2013), bootstrapping reduces the need for a business to source for external funds. By limiting the amount of money borrowed, businesses control the degree of liability to which they are exposed. It also ensures that an entrepreneur utilizes their resources to the maximum. However, bootstrapping may be restrictive when it comes to the financial capacity. It may also slow down a companys expansion process since the only capital injection will come from profits made in the previous fiscal period. On the other hand, financing an enterprise using equity allows a businessperson to obtain money without the need of paying interest. Also, equity does not have a fixed repayment date since the financier is effectively investing in the business. On top of that, equity financing is not secured by assets as is the case in debt financing. Further, it boosts a startups credibility. However, since the money is repaid in the form of ownership, the proprietor cedes control of their business to another entity. It is also hard to find a risk-taking investor (Abdulsaleh and Worthington 2013).

Debt financing is beneficial for small enterprises since many financial entities exist for the sole purpose of issuing loans to businesses and individuals. Further, startups are limited in the number of potential sources where they can borrow funds. Debt financing also exists in flexible time phases the (short or long term debt). However, debt financing may be hard for small entities to access since these types of loans are usually attached to assets, and new enterprises are not likely to have the required asset base. Also, new businesses attract higher interest rates on loans because they are risky borrowers (Abdulsaleh and Worthington 2013).

SBA microloans are advantageous because they are tailor-made for small businesses. Some of the loans also come with business management classes which greatly benefit inexperienced businesspersons. Nevertheless, these loans are at times more expensive than loans that one can access in banks (if they have a good credit rating) because they factor in the risks associated with lending to startups.

Preferred Source of Financing

Out of the four sources of funding, the SBA microloans are best suited for a seasonal ice cream venture. The loans interest rates range between 8 and 13%. SBA microloans are issued to a maximum of $50,000 which is exactly how much the ice cream company would need to kick start its operations. Further, getting SBA microloans is ideal for many new entrepreneurs who cannot secure funding from private lenders (it is also a requirement for one to get SBA funding). Interest rates for loans under $10,000 are priced at 8.5% minus the SBA rate. Loans above $10,000 are charged 7.75% interest exclusive of the SBA rate. 45,000 dollars at microloan interest rates would translate to 45,000*(3%+7.75%). This means that the costs are predictable and manageable. Lastly, the management classes which come with SBA microloans go a long way in assisting new entrepreneurs (Kimmel 2016; Mihajlov 2012).

Why the Other Sources of Finance are not Viable.

Debt financing through banks is not a viable option for the ice cream business because such types of financing usually require collateral from a proprietor. Those that do lend without collateral will charge high interest rates which may, in turn, affect the profitability of the business. Moreover, most of the equity that a small entity can access usually comes from friends and family. Such investments may not be enough to sustain or start the operations of the business. Also, small enterprises do not have similar access to equity capital markets in the same way as large enterprises (Mills and McCarthy 2014). Finally, bootstrapping may be a very restrictive option for the ice cream business, if it wants to expand its operations.

The Impact of Wrong/No Funding

If the ice cream business fails to obtain the necessary funding, the proprietor may be forced to scale down operations. This would mean that during peak season, demand will likely outstrip supply. It may lead to a situation where clients do not find what they are looking for. Alternatively, the proposed venture could be scrapped as the owner looks for alternative investment options. On the other hand, if the ice cream venture uses the wrong funding, it is likely to find itself trapped in a debt cycle which may make the business unsustainable.

References

Abdulsaleh, A. and Worthington, A. (2013). Small and medium-sized enterprises financing: A review of riterature. International Journal of Business and Management, 8(14), pp.36-45.

Calopa, M., Horvat, J., and Lalic, M. (2014). Analysis of financing sources for start-up companies. Management, 19, pp. 19-44.

Carey, M. (2017). Personal finance. [n.p], Oxford University Press.

Downing, G. (2012). Entrepreneur unleashed: Wealth to stand the test of time. Cork, BookBaby.

Kimmel, J. (2016). Evolving approaches to the economics of public policy: views of award-winning economists. Kalamazoo, W.E. Upjohn Institute for Employment Research.

Longenecker, J. G., Petty, J. W., Palich, L. E., & Hoy, F. (2017). Small business management: launching & growing entrepreneurial ventures. Boston, MA Cengage Learning.

Mihajlov, T. (2012). SBA 504 loans help improve balance sheets: a micro analysis. Journal of Marketing Development and Competitiveness, 6(1), pp. 22-26.

Miller, R. L. (2014). Business law today: the essentials: diverse, ethical, online, and global environment. Mason, OH, South-Western Cengage Learning.