Using The Internet Or Strayer Databases Exam Two 2 Sources

Using The Internet Or Strayer Databses Examinetwo 2sources Of Outsi

Using The Internet Or Strayer Databses Examinetwo 2sources Of Outsi

Using The Internet Or Strayer databses, examine two (2) sources of outside equity capital available to entrepreneurs. Next, describe the source(s) you would use if you were creating a new company. Explain your rationale. Using the Internet or Strayer databses, analyze two (2) sources of debt financing. Next, discuss which non-bank source you would use if you were creating a new company. Explain your rationale.

Paper For Above instruction

Entrepreneurs seeking outside funding to launch or expand their businesses have access to a variety of sources, notably outside equity capital and debt financing. Understanding these sources helps entrepreneurs make informed decisions aligned with their business objectives, growth strategies, and financial situations.

Sources of Outside Equity Capital

One prominent source of outside equity capital is venture capital (VC). Venture capitalists provide funding to startups and early-stage companies with high growth potential in exchange for equity stakes. According to the U.S. Small Business Administration (SBA, 2021), venture capitalists are often interested in innovative industries such as technology or biotech, where the potential for rapid growth and high returns attracts their investment. Venture capital firms also provide strategic guidance and networking opportunities, which can be invaluable for new companies aiming for aggressive expansion. The downside, however, is the dilution of ownership and the pressure to deliver quick returns, often leading to strategic shifts.

Another significant source of outside equity is angel investors. Angel investors are affluent individuals who invest personal funds into startups, often during early stages when other forms of funding are scarce (Kaplan & Strömberg, 2004). Angel investors typically seek to support entrepreneurs they believe in and may provide mentorship or industry expertise in addition to capital. Their investments are usually smaller than venture capital funds but are easier to access for very early-stage ventures. Entrepreneurs might prefer angel investors due to less stringent investment terms and more personalized relationships. For a new company, angel investors offer flexible funding options and can be crucial in the initial development phases.

Preferred Sources for a New Company

If I were establishing a new company, I would consider angel investors as the primary source of outside equity. This preference stems from their accessibility during the critical early stages, their willingness to invest smaller amounts of capital, and their potential to serve as mentors. Engaging angel investors can also provide the flexibility needed during the unpredictable initial phases of a startup when strategic adjustments are often necessary. Additionally, working with angel investors often entails less rigorous oversight compared to venture capital firms, which might be more suitable for an early-stage business needing initial capital infusion.

Sources of Debt Financing

The first source of debt financing to consider is bank loans. Bank loans are traditional debt instruments and have been a primary source of financing for decades. According to the Federal Reserve (2022), bank loans are accessible to established businesses with a proven credit history. They offer predictable repayment schedules and relatively low interest rates compared to unsecured borrowing. However, securing bank loans can be challenging for startups without substantial assets or a track record of profitability. Banks also perform thorough credit assessments, making it difficult for new entrepreneurs to qualify without collateral.

The second source of debt financing is angel investor loans or convertible debt. Some angel investors, in addition to equity investment, may offer loans that can convert into equity under certain conditions (Cumming & Zhang, 2019). Convertible debt provides flexibility for startups, as it allows initial borrowing with the potential to convert into equity if the company performs well. This structure can be attractive because it delays valuation negotiations until later funding rounds. For entrepreneurs seeking non-bank sources of capital, angel investor loans or convertible debt can serve as a bridge to future financing needs.

Non-Bank Sources of Financing for a New Company

Among non-bank sources, crowdfunding is gaining popularity as a financing avenue for startups. Crowdfunding platforms like Kickstarter and Indiegogo allow entrepreneurs to raise capital from a large pool of individual contributors (Mollick, 2014). This method is especially effective for consumer-facing products with mass appeal, as it not only raises funds but also helps validate market interest. Crowdfunding offers entrepreneurs access to capital without giving up equity or incurring debt in traditional sense; instead, entrepreneurs often provide rewards or pre-orders.

For my new company, I would use crowdfunding because it helps build an initial customer base while raising much-needed funds without the complexities of bank loans or angel investment negotiations. Moreover, it provides valuable marketing exposure and consumer feedback that can refine product offerings before full-scale market entry.

Conclusion

In summary, entrepreneurs have a spectrum of options for funding, including outside equity sources like venture capital and angel investors, and debt options such as bank loans and convertible debt. Choosing the appropriate source depends on factors like the company's stage, industry, growth potential, and risk tolerance. For an early-stage startup, angel investors and crowdfunding present attractive, flexible options to secure essential capital and build investor/developer relationships that can facilitate future growth.

References

  • Federal Reserve. (2022). Senior Loan Officer Opinion Survey on Bank Lending Practices. Federal Reserve Bank Publications.
  • Cumming, D., & Zhang, M. (2019). Venture capital financing: An overview. Journal of Business Venturing, 34(1), 1-8.
  • Kaplan, S. N., & Strömberg, P. (2004). Characteristics, Contracts, and Outcomes of European Venture Capital. The Journal of Finance, 59(5), 2177–2210.
  • Mollick, E. (2014). The dynamics of crowdfunding: An exploratory study. Journal of Business Venturing, 29(1), 1–16.
  • Small Business Administration (SBA). (2021). Venture Capital and Its Role for Small Business. U.S. SBA Publication.
  • Federal Reserve Bank. (2022). Small Business Credit Conditions and Lending Practices. Federal Reserve Publications.
  • Cumming, D., & Zhang, M. (2019). Venture capital investment: An overview. Journal of Business Venturing, 34(1), 1–8.
  • Kaplan, S., & Strömberg, P. (2004). Characteristics, Contracts, and Outcomes of European Venture Capital. The Journal of Finance, 59(5), 2177–2210.
  • Mollick, E. (2014). The dynamics of crowdfunding: An exploratory study. Journal of Business Venturing, 29(1), 1–16.
  • Small Business Administration (SBA). (2021). Venture Capital and Its Role for Small Business. U.S. SBA Publication.

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