Running head: Case 2 Able Planet
Case 2 Able Planet
The difficulties entrepreneurs face when raising between over $100,000 for their businesses
4 Ways Kevin Semcken can raise $1.5 million in capital
Memo to Kevin Semcken
This paper will analyze Case Study 2 Able Planet. In this case study, Kevin Semcken, Able Planet’s CEO and chairman is seeking capital to finance existing operations for its current products, build a prototype for a new product and market both products to new and current customers (Scarborough, 2012). Furthermore, Able Planet is unable to secure financing from a bank due to a predicament in the economic markets which has all but closed shut the lending opportunities at most commercial banks. Information that will be evaluated includes the following:
Why entrepreneurs face difficulties when trying to raise between $100,000 and $3 million for their businesses •
Ways Kevin Semcken can raise $1.5 million in capital by use of both debt and equity financing •
What should be done before approaching potential lenders and investors in order to maximize the chance of getting needed capital
The difficulties entrepreneurs face when raising between over $100,000 for their businesses Capital is the lifeline of any business; it supplies the funds to expand, grow and make a promising business idea into a money-making enterprise. However, many entrepreneurs miscalculate how difficult it is to obtain financing for a business venture and get annoyed by this step of the business startup process. Nevertheless, investors and banks have plenty of reasons to be wary of financing especially it involves several thousands of dollars. Some of the reasons that entrepreneurs have issues when trying to raise large sums of capital include: •
Most small business fail: According to Channon (2012), “More than 50 percent of businesses fail within the first five years of operation.” This makes its difficult to raise capital due to the uncertainty in getting a return on an investment. •
Unproven Business Model (Channon, 2012): If the business idea is new, then there is no historical data such as sales to show that the business will last. This means that there is no guarantee that the business will repay the loan or increase the investor’s equity. •
Lack of Coherent Business Plan (Channon, 2012): This will prevent lenders and investors from financing a business. The business plan will give a financial forecast along with market research and a list of competitors. This will allow investors to see an actual financial result that are expected and help them to decide of this is realistic.
Ways Kevin Semcken can raise $1.5 million in capital
Whether Kevin Semcken is preparing to launch a new product or is trying to grow Able Planet, one thing is for certain; he will need money. Debt and equity financing are two different financial strategies that can be used to raise capital: Taking on debt means borrowing money for the business, while gaining equity entails injecting his own or other stakeholders’ cash into the business. Mr. Semcken can use debt financing as a means to raise the needed capital. One way to do this is borrowing from a financial institution. This involves loans that have to be paid over time and with interest. Able Planet can borrow money over the short term (less than one year) or long term (more than one year). The chief sources of debt financing are banks and government agencies, such as the Small Business Administration (Rath, 2012). Debt financing presents businesses a tax advantage, because the interest paid on loans is usually deductible. Borrowing also reduces the company's future requirement for loan repayments, because the lender does not obtain an ownership share in the business. However, debt financing also has its disadvantages. New businesses at times find it hard to make regular loan payments...
References: Channon, T. (2012). Why is it So Hard to Raise Capital When Starting a New Business?. Ehow. Retrieved August 10, 2012, from http://www.ehow.com/about_7448696_hard-capital-starting-new-business_.html
Clifford, C. (2012, June 15). 9 Things Startups Must Know Before Approaching Lenders. Entrepreneur. Retrieved August 10, 2012, from http://www.entrepreneur.com/blog/223818
Rath, T. (2012). Debt and Equity Financing: Two Options for Financing Your Small Business. About.com. Retrieved August 9, 2012, from http://sbinformation.about.com/od/creditloans/a/debtequity.htm
Scarborough, N. (2012). Effective Small Business Management. (10th ed.). (p. 812). Boston, MA: Prentice Hall.
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