Business and Accounting

Abstract

 

 

 

 

 

 

 

 

 

Table of contents                                                                                                       page

Topic                                                                                                                           3

Sources of capital for a company                                                                               4

Rewards for those who fund a company                                                                     5

 

Sources and evaluation of risk                                                                                    6

 

Techniques of choosing between funding sources                                                     8

 

 

 

 

 

 

 

 

 

 

 

Funding businesses.

Commercial loans usually allow you to borrow a set amount of money and repay it with interest over a set period. Loans can be divided into two categories: secured and unsecured. Business loans backed by collateral The borrower secures the loan by pledging some form of collateral, such as a home, car, or stock, against the loan’s value. If repayment fails, the asset can become forfeit to the loan provider. Unsecured business loans are those that are not backed by collateral. The borrower is not forced to put up any securities, and the loan is granted based on the borrower’s current financial situation. Business loans are generally seen as a source of finance for the medium to long term. Loans are usually advantageous because there are numerous choices available, both for commercial purposes and through the government. You aren’t attempting to sell equity in your company as you would with venture funding, and you have the freedom to buy around for a reasonable payment percentage and plan. There are also a few tax advantages for companies in the Country when repaying a loan. (Steweneski 2016 69(6), pp.2108-2112)

Invoice financing enables businesses to borrow funds against the worth of outstanding customer invoices. Invoice factoring and discounting are the two most common types of invoice financing. Typically, you can get up to 85% of the value right away, with the remainder (minus the finance charge) coming whenever the consumer pays the invoice. If you have many commercial or Small medium consumers who have lengthy payment terms or expect to be paid as late as possible, invoice finance could be a great option for you. It’s a great way to fill in the gaps in your cash flow. In most cases, your invoice is bought as debt; it’s common practice that if the invoice isn’t paid, you’ll be protected from any debt owed.

In the short term, a bank overdraft is a great way to get money. Businesses can use their existing account and make payments that surpass their total balance with an agreed overdraft. In other words, when the balance falls below zero, the company owes the bank money. You could indeed draw any amount up to the agreed-upon limit, referred to as the facility. Depending on their needs and credit history, businesses can strike varying deal amounts with the bank. In addition to the interest billed on the overdraft credit, some banks charge an overdraft facility fee. Banks may require companies to post protection in the form of tangible fixed assets or a personal guarantee from the company’s director to obtain a larger overdraft facility. (Coleman 2010 p.497.)

A startup loan can help entrepreneurs finance their new business. A private loan supported by the state is accessible to clients looking to start or expand a business in the United Kingdom. Not only do qualified candidates receive funding, but they will also receive complimentary 12-month business mentoring. People starting a business may be eligible for startup loans of up to £25,000 in borrowed credit. The loan comes with a low fixed annual interest rate and a repayment period of 1 to 5 years. This is one of the most appealing sources of funding for startups, as it provides a significant amount of money and valuable expertise. If you’re over the age of 18, live in the U.K., and have been in business for less than 24 months, you could also apply on the government’s website.

Factors to consider when choosing between alternative funding techniques

Take into account how long the funding arrangement is expected to last. Longer loans can accumulate a considerable amount of interest over time, whereas shorter loans may necessitate larger monthly payments. Evaluate the number of recurring payments and the frequency with which you must make them. Consider the percentage of each payment allocated to accrued interest; look for loans with a greater proportion of payments allocated to principal to reduce the total long-term cost. Before you make a decision, add up all of the expenses involved with each source of finance. Interest rates, origination fees, and broker fees are examples of common loan costs. Funding through investors can have a wide range of costs. (J.B. and Kohut, K., 2017.)

Currently Existing Business Structure: Another factor that influences the idea of money borrowing is the structure of your company. If your company is already formally organized as a joint venture, selling equity may be more difficult. You’ll also need to officially announce your company to be a public company if you want to secure equity financing through public channels, such as trading shares on the open market. Though your business model can be altered in the long run, there is no doubt that the structure you have now will have a massive effect on your brief debt financing. (Fraga-Lamas, P., 2018. Pg. 6)

Requirements for Additional Financing

If you’re thinking about using the investment to fund your company, make sure you understand all of the implications before deciding. Venture capitalists also demand a share of the company’s ownership, which they anticipate you to repurchase at a higher price after a time of growth. However, before you buy back the ownership stake, the investor can exert a significant amount of control over administrative and strategic choices. Selling stock to fund a corporation comes with its own set of important factors, such as the risk of losing executive power in the future and succumbing to a larger company’s takeover.

Evaluation of risks

Money from venture capitalists, for example, may not need to be repaid for years, at which point the investor may expect to be repaid all at once at a high premium. Stock offering financing can result in a change in management and a shift in strategic focus. The goal of risk evaluation is to determine what approximated risk means to those concerned about or affected by it. The way people perceive risks will play an important role in this assessment. As well as an understanding of why risks are perceived in various ways. Risk reduction will be the risk mitigation option chosen for most environmental risk (Chilamkurti, N., 2019 pg. 489-502) assessment carried out on behalf of the society by nations. Risk transfer is a popular strategy for both individuals and businesses. This could be mandated by law, especially in the case of infrequent catastrophic events. The elimination of an agent can have a wide range of social and economic consequences, making risk elimination difficult. The removal of a pesticide, for example, could have ramifications for a region’s socioeconomic situation. Substitution is a term used to describe when something is replaced. Is it possible to replace the agent with a less dangerous one? Is it possible to substitute a biological method for a chemical pesticide, for example? What are the dangers of introducing a new agent into the situation? Is the local agent as effective as the old one (Patak, M.R., 2018 Pg. 54-69)

Information is important. By providing information on the safe use and decommissioning of agents, it will be useful to guarantee that the risks evaluated are the same as those that occur in practice. Information and education may also enable the general public and users to select lower-risk options, forcing manufacturers to produce less dangerous agents. Marketing bans or restrictions on the manufacturing or shipment of the agent are used to limit the agent’s availability. Such a risk-mitigation strategy has serious political and economic ramifications, and it is frequently contentious. These decisions are made at the national or regional level, and international treaties are hard to come by.

methods of incorporating risk into financial decision-making models

Certainty equivalent method: This is the first method in which anticipated investment returns are changed to predict project risk – high-risk investment returns are downscaled. The lower the equivalent certainty values, the riskier the flows are. It’s a method for converting uncertain cash flows into other cash flows by increasing them by a probability of occurrence, such as cash flows. It’s the risk-free cash inflows that an investor considers to be the same as a higher but riskier, expected cash flow. (Katz, S.J., 2017 pg. 2232)

The risk-adjusted discount rate method is the second procedure for dealing with differential project risk by changing the discount rate. Projects with average risk are discounted at the firm’s corporate cost of capital, projects with higher risk are given a discount at an increased cost of capital, and low-risk investments are given a discount at a rate lower than the corporate cost of capital. Investors required the risk-adjusted discount rate represents periodical returns for creating funds from the specific property. The concept is based on the risk-reward relationship. (Goh, M., 2017 pg. 646-682)

appropriate methods for making long and short-term asset allocation decisions

Asset Allocation in a Strategic Way: This method creates and maintains a ground policy mix—an approximately equal mix of resources depending on expected returns for each asset class—and sticks to it. It would be best if you also consider your tolerance for risk and time frame for investing. People can set their goals and then readjust their portfolios regularly. A strategic asset allocation strategy is similar to a buy-and-hold strategy in that it emphasizes diversification to reduce risk and increase returns. (Melnikova, Y., 2019 pg.1-6)

Asset Allocation with Constant Weighting: Even if asset values change, strategic asset allocation usually entails a purchase and retain strategy, even if it deviates from the initial policy mix. As a result, you might prefer to use a constant-weighting asset allocation strategy. This strategy allows you to rebalance your portfolio regularly. For instance, if the value of one asset drops, you might buy more of it. And if the asset’s value rises, you’ll be able to sell it. When using a strategic or continuous weighing asset allocation, there are still no specific regulations for rebalancing your portfolio. However, when any asset class jumps upwards of 8% from its original value, a basic rule of thumb states that the portfolio should be readjusted to its initial form.

In conclusion, I have found out that there are several sources of income for a business. Some of them include; bank overdrafts, assets financing, operating on hire purchase, startup loans, and even contributions from members. Before a business choosing any of these sources, it should consider the terms of the moneylender and opt-in for the ones with the most favorable terms. Some sources of income can charge very high interest rates. This interest is gained through a long time offered to repay the loan. A business should choose a source with less repayment time to reduce the amount of interest gained on the loan. In my research, I also found out that these sources of income for businesses also get their benefits like getting back their money with interest which is a good investment. I also looked at the risks in a business and its sources. Some risks are avoidable, while others aren’t since different factors cause them. Finally, I looked at appropriate methods for making long and short-term asset allocation decisions. Some of these methods are strategic asset allocation and constant weighing of the decisions.

 

 

 

References

Staniewski, M.W., Szopiński, T. and Awruk, K., 2016. Setting up a business and funding sources. Journal of Business Research69(6), pp.2108-2112.

Coleman, S. and Robb, A., 2010. Sources of funding for new women-owned firms. W. New Eng. L. Rev.32, p.497.

Allahyari, M., Pouriyeh, S., Assefi, M., Safaei, S., Trippe, E.D., Gutierrez, J.B. and Kochut, K., 2017. Text summarization techniques: a brief survey. arXiv preprint arXiv:1707.02268.

Fernández-Caramés, T.M. and Fraga-Lamas, P., 2018. A Review on the Use of Blockchain for the Internet of Things. Ieee Access6, pp.32979-33001.

Abdel-Basset, M., Gunasekaran, M., Mohamed, M. and Chilamkurti, N., 2019. A framework for risk assessment, management, and evaluation: Economic tool for quantifying risks in the supply chain. Future Generation Computer Systems90, pp.489-502

Hudakova, M., Masar, M., Luskova, M. and Patak, M.R., 2018. The dependence of perceived business risks on the size of SMEs. Journal of Competitiveness10(4), pp.54-69.

Kurian, A.W., Li, Y., Hamilton, A.S., Ward, K.C., Hawley, S.T., Morrow, M., McLeod, M.C., Jagsi, R. and Katz, S.J., 2017. Gaps in incorporating germline genetic testing into treatment decision-making for early-stage breast cancer. Journal of Clinical Oncology35(20), p.2232.

Rajagopal, V., Venkatesan, S.P. and Goh, M., 2017. Decision-making models for supply chain risk mitigation: A review. Computers & Industrial Engineering113, pp.646-682.

Hilorme, T., Zamazii, O., Judina, O., Korolenko, R. and Melnikova, Y., 2019. Formation of mitigating risk strategies for the implementation of projects of energy-saving technologies. Academy of Strategic Management Journal18(3), pp.1-6.

 

 

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