What are the ways to make a Term Paper on Finance subject?
One of the most difficult problems in the new venture creation process is obtaining financing. For the entrepreneur, available financing needs to be considered from the perspective of debt versus equity and using internal versus external funds as the funding source.
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Debt or Equity Financing
Two types of financing need to be considered: 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. Typically, debt financing requires that some asset be used as collateral. Debt financing requires the entrepreneur to pay back the amount of funds borrowed as well as a fee expressed in terms of the interest rate.
If the financing is short term (less than one year), the money is usually used to provide working capital to finance inventory, accounts receivable, or the operation of the business. The funds are typically repaid from the resulting sales and profits during the year.
Long-term debt (lasting more than one year) is frequently used to purchase some asset such as a piece of machinery, land or a building, with part of the value of the asset being used as collateral for the long-term loan. When interest rates are low, debt financing (as opposed to equity) allows the entrepreneur to retain a larger ownership portion in the venture and have a great return on the equity.
Equity financing does not require collateral and offers the investor some form of ownership position in the venture. The investor shares in the profits of the venture, as well as any disposition of its assets on a pro rata basis. Key factors favoring the use of one type of financing over another are the availability of funds, the assts of the venture, and the prevailing interest rates. Usually, an entrepreneur meets financial needs by employing a combination of debt and equity financing. There are advantages and disadvantages to the entrepreneurial investor for this form of financing. Liability and risk increases but so do rewards.
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