Obtaining financing is one of the challenges facing a new venture. The financial planning and good budgeting will be significant factors in helping Portions Restaurant reach success. The restaurants financial statement analysis below lists the sources of funding, the capital structure, debt to equity ratios, the intentions of going public and a break even analysis. The sources of funding
Portions Restaurant is operating as a sole proprietorship, as a sole proprietorship, the restaurant will have limited sources of funds. In a sole proprietorship the owner’s personal financial condition determines his or her credit standing. Additionally, sole proprietorships may have to pay higher interest rates on funds borrowed because they are considered large risks (Ferrell, 2010 p.147). Among the few sources of money available for the restaurant are personal finances, family and friends banks and The Small Business Administration (SBA).
Personal funds are the least expensive in terms of cost and control; they are also essential in attracting outside funding. Typical sources include savings, life insurance, or mortgage of a house or car. Start- up capital for Portions Restaurant will include 401k and mutual fund investment of the owner. Portions Restaurant believes that the use of personal income will be attractive to investors.
Portions Restaurant will also seek financial support from family and friends. Family and friends are more likely to invest due to their relationship with the entrepreneur but there are disadvantages associated with this source. Small amounts of money are invested yet this may make them feel they have a direct input into the operations of the venture (Hisrich, 2010 p. 312). To prevent conflicts, upon receipt of the investments, Portions Restaurant will detail its intentions for the use of the money, the rights of the investor and the repayment schedule.
Commercial banks are the most frequently used source of short-term funds when collateral is available. This type of debt financing requires some tangible guaranty or collateral. Although Portions Restaurant will employ the use of personal funds – attractive to investors – qualifying for commercial bank loans can be challenging. Therefore Portions Restaurant will seek and SBA loan. Government grants or guarantees
Portions Restaurant is investing $60,000 of personal funds, plus a $200,000 SBA 7(A) loan guaranty and seeking an additional $125,000 from investors to start up the company. Upon approval of the 7(a) loan, the restaurant will use the proceeds for a variety of the restaurant’s business purposes including working capital, equipment, furniture and fixtures, and leasing the building. The 7(a) Loan Program includes financial help for businesses with special requirements. For example, funds are available for loans to businesses that handle exports to foreign countries, businesses that operate in rural areas, and for other very specific purposes (sba.gov). The loan also allows for long-term working capital, including the payment of accounts payable and/or the purchase of inventory, short-term working capital needs, including seasonal financing, contract performance, construction financing and export production and financing against existing inventory and receivable under special conditions. All are important factors for Portions Restaurants and make the 7(a) loan program attractive. The ratio of debt to equity
Portions Restaurant’s available financing were considered from the perspective of debt versus equity and using internal versus external funds. There are two types of financing: debt financing and equity financing. Debt financing is a financing method involving an interest-bearing instrument, usually a loan, the payment of which is only indirectly related to the sales and profits of the venture. Equity financing does not require collateral and offers the...