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MNE3701 ASSIGNMENT GUIDE 2023
- Cours
- Établissement
THE DOCUMENT IS AN EXAMPLE OF HOW STUDENTS MUST ANSWER THE ASSIGNMENT
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muzavazi47@gmail.com MNE3701 2023 0717513144DISCLAIMER
THE DOCUMENT CONSISTS OF MNE3701 2023 PROPOSED SOLUTIONS. THIS
IS NOT AN OFFICIAL DOCUMENT FROM UNISA BUT IT IS A GUIDE THAT
WOULD HELP STUDENTS ON ANSWERING QUESTIONS OF SIMILAR NATURE.
FOR EXPLANATIONS, STUDENTS CAN CONTACT THE FOLLOWING DETAILS:
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QUESTION 1 (this contains excessively enough information,
please trim it to reasonable size roughly 2 to 4 pages)
By using practical examples, critically discuss how you would finance your
business. Motivate why you choose specific ways of financing over others. (10).
Financing is needed to start a business and ramp it up to profitability. There are several sources
to consider when looking for start-up financing. But first one needs to consider how much
money is needed and when will it be needed. The financial needs of a business will vary
according to the type and size of the business. For example, processing businesses are usually
capital intensive, requiring large amounts of capital. Retail businesses usually require less
capital. Most entrepreneurs use multiple methods to access capital for their small businesses,
including personal savings. External sources of financing fall into two main categories: equity
financing, which is funding given in exchange for partial ownership and future profits; and debt
financing, which is money that must be repaid, usually with interest. Grants are funds that do
not need to be repaid, and may be offered by government agencies, non-profit organizations,
or for-profit companies.
Funding availability can depend on how established or mature a business is. Financing a brand-
new start-up is more difficult since there is no business track record yet. Because of this risk,
it may be easier to attract equity financing than debt financing. Funds for a growing business
will be much more available because the business already exists and has some financial
statements to extrapolate from. For this reason, more mature businesses will find it easier to
access debt financing. However, equity financing may be harder for mature businesses to find
because the business, or industry, has plateau-ed with little forecast for growth. When creating
a financial plan, entrepreneurs may find it useful to compare their business or potential business
to industry standards for the same or a related industry or to a public company in the field
which has disclosed financial information.
Equity Financing
Equity financing means exchanging a portion of the ownership of the business for a financial
investment in the business. The ownership stake resulting from an equity investment allows
the investor to share in the company’s profits. Equity involves a permanent investment in a
company and is not repaid by the company at a later date.
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The investment should be properly defined in a formally created business entity. An equity
stake in a company can be in the form of membership units, as in the case of a limited liability
company or in the form of common or preferred stock as in a corporation.
Companies may establish different classes of stock to control voting rights among shareholders.
Similarly, companies may use different types of preferred stock. For example, common
stockholders can vote while preferred stockholders generally cannot. But common
stockholders are last in line for the company’s assets in case of default or bankruptcy. Preferred
stockholders receive a predetermined dividend before common stockholders receive a
dividend.
Personal Savings
The first place to look for money for small business proprietors is own savings or equity.
Personal resources can include profit-sharing or early retirement funds, real estate equity loans,
or cash value insurance policies.
Life insurance policies: A standard feature of many life insurance policies is the owner’s ability
to borrow against the cash value of the policy. This does not include term insurance because it
has no cash value. The money can be used for business needs. It takes about two years for a
policy to accumulate sufficient cash value for borrowing. One may borrow most of the cash
value of the policy. The loan will reduce the face value of the policy, and, in the case of death,
the loan has to be repaid before the beneficiaries of the policy receive any payment.
Home equity loans: A home equity loan is a loan backed by the value of the equity in one’s
home. If the home is paid for, it can be used to generate funds from the entire value of home.
If the home has an existing mortgage, it can provide funds on the difference between the value
of the house and the unpaid mortgage amount. Some home equity loans are set up as a revolving
credit line from which one can draw the amount needed at any time. The interest on a home
equity loan is tax deductible.
Personal investment
When borrowing, one invests some of their own money—either in the form of cash or collateral
on personal assets. This proves to banker that one has a long-term commitment to his/her
project.
Love money
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This is money loaned by a spouse, parents, family or friends. A banker considers this as "patient
capital", which is money that will be repaid later as the business profits increase. When
borrowing love money, one should be aware that:
• family and friends rarely have much capital
• they may want to have equity in business—be sure not to give this away
• a business relationship with family or friends should never be taken lightly
Venture Capital
Venture capital refers to financing that comes from companies or individuals in the business of
investing in young, privately held businesses. They provide capital to young businesses in
exchange for an ownership share of the business. Venture capital firms usually do not want to
participate in the initial financing of a business unless the company has management with a
proven track record. Generally, they prefer to invest in companies that have received significant
equity investments from the founders and are already profitable.
Venture capital investors also prefer businesses that have a competitive advantage or a strong
value proposition in the form of a patent, a proven demand for the product, or a very special
(and protectable) idea. They often take a hands-on approach to their investments, requiring
representation on the board of directors and sometimes the hiring of managers. Venture capital
investors can provide valuable guidance and business advice. However, they are looking for
substantial returns on their investments and their objectives may be at cross purposes with those
of the founders. They are often focused on short-term gain.
Venture capital firms are usually focused on creating an investment portfolio of businesses with
high-growth potential resulting in high rates of returns. These businesses are often high-risk
investments. They may look for annual returns of 25-30% on their overall investment portfolio.
Because these are usually high-risk business investments, they want investments with expected
returns of 50% or more. Assuming that some business investments will return 50% or more
while others will fail, it is hoped that the overall portfolio will return 25-30%.
More specifically, many venture capitalists subscribe to the 2-6-2 rule of thumb. This means
that typically two investments will yield high returns, six will yield moderate returns (or just
return their original investment), and two will fail.
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