Answer to Question #208931 in English for nico

Question

Considering your business idea, identify and evaluate the strengths and weaknesses

of THREE sources of finance available to your business start-up.

Answer 1

Three sources of finance available for my business start-up include:

• Personal investment:

This includes personal savings or collateral on one's assets.

Strengths:

The funds are easily available for usage.

It is cost-effective as there are no interest charges applied.

It attracts investors to the start-up as it portrays long-term commitment to one's project and readiness to take risks.

Self-financing grants one more control than other finance options as you avoid risks associated with external sources and one ha full ownership of the business.

Weaknesses:

It may be limited and thus funds short-term cash requirements for the business.

It's not a sustainable source of finance to efficiently grow a business.

One misses out on the mentoring and networking opportunities that investors and venture capitalists provide to start-ups.

• Borrowing privately:

This is support money lent by a spouse, family or friends to be repaid later once the start-up starts making profits. Borrowing privately is often an informal arrangement based purely on trust and verbal assurances.

Strengths: It is a flexible option as family and friends will offer loans without security or accept less security than conventional sources.

They may lend funds interest-free or at a low rate.

Close parties may agree to a longer payment period r lower return on their investment than formal lenders.

Weaknesses:

It's a complex arrangement and a misunderstanding about the agreement can damage personal relationships.

Relying on family and friends for finance has an added pressure of not wanting to let down those close to someone.

The financing parties may demand to get more involved in the business, which may not be appropriate.

• Bank loans:

Banks offer short-term and long-term debt finance to new businesses in form of loans and overdrafts. This option is available through loan application to the bank and the bank lends to the start-up on the basis of adequate return on investment, assessment of defaulting risks and the loan's administrative costs among other features.

Strengths:

Loans are not repayable on demand and so available for the term of the loan.

Their security can be tied to the lifetime of equipment or assets one is borrowing the money to pay for.

One can negotiate for a repayment holiday at the beginning of the term of the loan- meaning just paying interest for a while while repayment on the principal amount is frozen.

Interest rates are fixed and thus, one is aware of the level of repayments throughout the life of the loan.

Weaknesses:

They are not very flexible and thus, one may be paying interest on funds they're not using.

One may experience trouble meeting monthly repayments thus causing cashflow problems.

Sometimes, loans are secured against personal possessions thus placing them at risk if one cannot meet the repayment amount.