Financial Sources for Demo Pty Ltd Company Startup

Running head: FINANCIAL SOURCES FOR DEMO PTY LTD 1
Financial Sources for Demo Pty Ltd Company Startup
Name
Institution

FINANCIAL SOURCES FOR DEMO PTY LTD 2
Financing Sources for Demo Pty Ltd. Company Startup
Like public Companies, Demo Pty Ltd Company (private), require funding for a range of
reasons. A business characteristically requires greatest financing amount during start and
expansion (growth) stages. However, the company might need a cash injection for R&D, new
equipment or inventory. Whereas financing alternatives for a private company are several; every
choice is accompanied by specific stipulations. Funds from personal savings; family and friends;
bank loans; private equity via angel investors; alongside venture capitalist are all alternatives for
financing throughout a private company life cycle.
Part 1: Start-up Level: Appropriate Source and Inappropriate Source
Assumptions:
1. The business owners have a considerable amount of personal savings
2. The business is a new one and hence no retained earnings
3. The business is starting as a fresh private company and no partnership required
4. The business is not big a size to warrant colossal capital (at start-up)
A. Appropriate Sources
Personal Savings/equity: This must be the first place to seek for money when starting a
business. The personal resources will include profit-sharing/early retirement funds, real estate
equity or even cash value insurance policies. The personal resources are the most desirable to
finance the business operations at the start-up stage (Verheul & Thurik, 2001). The business
owners must first pull from saving, take a distribution from a retirement account. Take out a 2nd
mortgage on the residence. Only if they dry up will the owners may borrow from family and
friends. The reason for personal saving preference is that it gives owners much more control and
they do not need to pay back or even depend on outside lenders/investors, who might decide to

FINANCIAL SOURCES FOR DEMO PTY LTD 3
withdraw their support at any point. Also, the business will retain full possession hence 100%
received from future profits.
Friends and Family: The owner may look for private financing from friends and
families. This can be regarding equity financing whereby friend/relative receives a possession
interest in the company. Nevertheless, the investment has to be made in similar formality used
with external investors (Romano, Tanewski & Smyrnios, 2011). Private financing from close
friends and relatives come mostly in small increments between $5,000 and $10,000 with a
flexible repayment. Friends and family who invest in the business usually do not take active
operational roles. In this case, it is recommended that the business should only take the money
regarding borrowing rather than having those friends and relative invest in the business (Mason,
2006). The reason for preferring friends and family borrowing is that; the business owners will
still be under the owners and also the repayment is flexible as they are close to each other.
B. Inappropriate Source
Bank Loans: The source is not appropriate when the business is starting because first,
banks require proof of strong financial track record which is lacking because it is a startup. It is
hence never appropriate at start-up because the owners lack revenue sources and levels of profit
to get approved (Holmes & Kent, 2011). Automatically, a start-up private company is
unqualified for bank loan financing. However, it would be advantageous as it provides smart
financing source was it an established business. This is because it allows extended repayment
over the period with foreseeable fixed monthly repayments.
Overdraft: The overdraft is inappropriate at start-up phase because it is attached to
higher interest, has a risk of seizing, and lethargic debtor’s collection. However, it would be