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  • Topic: Debt, Loan, Credit default swap
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  • Published : March 11, 2013
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STUDENT NAME: NADEZHDA KOSTADINOVA

FINANCIAL SOURCES, AVAILABLE TO OUR BUSINESS

Internal :
- Capital
External :
Еxternal as a main source of finance
- Bank loans
- Equity finance
- Credit cards and overdraft

Еxternal as a financial source for equipment
- Hire Purchase
- Leasing

OWNER FINANCE (CAPITAL)

The Owner financing – Capital is source of finance which can be explained as using money which come from the owners. It is a financial resources available for use.

IMPLICATIONS OF CHOICE:

Legal: Nothing can happen, because it owner’s money. It is impossible to sign a contract with yourself and take a future obligations.

Finance: Lost of money, could owe someone. Doesn’t pay back the money, doesn’t pay interest.

Dilution of control: There will be no dilution of control due to the fact that the money are your own and you can use it however you want. Only in case of partnership, the partner may take the control.

Bankruptcy: It is a possibility that in the event of bankruptcy, you can lose your money and if you owe to someone else you can sell all of the assets you have. With the money you have from the selling you will pay back all of our dues.

Advantages - Owner financing is a perfect choice if it is possible because the money which you use are your own and you don’t need to give them back to anyone else. It is not necessary to think and worry about the period you have to give them back and you don’t need to pay an interest on them.

Actually, when you use own money to start-up business you don’t take big risk and you don’t lose money when you pay interest to somebody else. Your business profit is going to increase when you don’t pay interest and don’t pay back any money.

Disadvantages – There is always the risk of losing your own money and if you don’t have a big amount saved up for yourself it maybe very inconvenient for you.

You can lose the control and the business, in case of partnership. The partner may take the control and may influence the business in ways you would never wanted to or take the different direction of the development.

BANK LOAN

This sort of loans are considered as long term with very low interest and are commonly knows as "Venture Loan".  

IMPLICATION OF CHOICE:

Legal - The company will have to sign a loan agreement.

Financial – The bank loans are hard to acces from most entrepreneurs because lenders want proof that it will be paid back. The company which apply for loan have to provide a detailed business plan bank, to prove that the business will be successful and profitable. Security of the bank signed CDS (Credit default swap) is a financial swap agreement that the seller of the CDS will compensate the bayer in the even of a loan default or other credit event.

Dilution of control: Debt financing does not involve dilution of ownership.The debt investor may not have the power to control the company as long as the interest and principal is paid on time.The management just needs to focus on profitability of the company to cover the interest and principal of the debt.

Bankruptcy is a legal status of an insolvent person or an organisation, that is, one who cannot repay the debts they owe to creditors. In most jurisdictions bankruptcy is imposed by a court order, often initiated by the debtor. In our case, bankruptcy would result in the loss of all assets that we have,but this way we can restore to the bank most of the amount due.

CREDIT CARDS AND EQUITY FINANCE AS A SOURCE OF FINANCE

Equity finance

The act of raising money for company activities by selling common or preferred stock to individual or institutional investors. In return for the money paid, shareholders receive ownership interests in the corporation.

IMPLICATION OF CHOICE:

Legal – Need to be sign a contract between company’s members, so if something go wrong with one...
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