Financial Sources Analysis: Demo Pty Ltd Startup and Expansion

This report provides a detailed analysis of appropriate financial sources for Demo Pty Ltd, a private company, during its startup and expansion phases. It begins by recommending personal savings and funding from friends and family as suitable options for the startup phase, given the company's lack of financial track record and the need for owner control. Bank loans and overdrafts are deemed inappropriate at this stage due to stringent requirements and high interest rates. For the expansion phase, the report suggests bank loans and commercial papers as viable options, assuming the company has established a credit rating and requires funds for R&D, equipment, and inventory. Venture capitalists are considered inappropriate due to potential loss of control. The report emphasizes the importance of aligning financing sources with the company's growth stage and financial capabilities, providing a comprehensive overview of funding strategies for private companies.

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

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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

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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

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appropriate during expansion because it handles timing mismatch of funds flow and helps keep a
good track record.
Commercial Papers: A commercial paper is never appropriate during the startup
because the firm is new and hence lacks the desired high-quality debt ratings that would have
otherwise help it find buyers unless they offer significant discounts.
Part 2. Expansion: Issues and Sources of Financing
A. Issues: At Expansion
At expansion, the private company will need colossal financing. This is because it will
have to require cash infusions for R&D, new equipment, and inventory. The company will be
showing substantial revenue but may not be realizing a profit. The financing here aims at the
provision of working capital for initial business expansion as the business is producing and
shipping items and has expanding account receivable and inventories. Still, the company still has
some instances where the progress has not been made (Cassar, 2014).
B. Financing Sources:
1. Appropriate Sources
Bank Loan: Bank would be beneficial because it will provide smart financing source
since the company shall have been established. This is because it allows extended repayment
over the period with foreseeable fixed monthly repayments.
Commercial Papers: With the high-quality rating in the future, it might be used to get
short-term debt to finance account receivable, inventories and meet short-run liabilities because
it doesn’t need to be registered with SEC so long as maturity is under nine month/270 day hence
it is a cost-effective source.
2. Inappropriate Sources

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Venture Capitalist and funds: While it might appear appropriate by taking a minority
position, they will make the owners lose control of the business.

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References
Cassar, G. (2014). The financing of business start-ups. Journal of business venturing, 19(2), 261-
283.
Holmes, S., & Kent, P. (2011). An empirical analysis of the financial structure of small and large
Australian manufacturing enterprises. The Journal of Entrepreneurial Finance, 1(2), 141.
Mason, C. M. (2006). Informal sources of venture finance. In The life cycle of entrepreneurial
ventures (pp. 259-299). Springer UK.
Romano, C. A., Tanewski, G. A., & Smyrnios, K. X. (2011). Capital structure decision making:
A model for family business. Journal of business venturing, 16(3), 285-310.
Verheul, I., & Thurik, R. (2001). Start-up capital:" does gender matter?". Small business
economics, 16(4), 329-346.