Masters in Finance Report: Khayelitsha Cookies Financing Analysis

This report, prepared for a Masters in Finance course, examines various financing tools available to Khayelitsha Cookies, a business facing financial challenges. The report analyzes three primary financing options: bank loans, social venture capital, and crowdfunding. It details the advantages and disadvantages of each, such as the security requirements and potential cash flow problems associated with bank loans, the relaxed repayment models and quick funding of social venture capital, and the market validation and exposure benefits of crowdfunding. The report also considers the shortcomings of each option, including the financial return requirements of social venture capital and the potential for failed projects in crowdfunding. The analysis provides a comprehensive overview of how Khayelitsha Cookies can navigate its financial needs, considering the suitability and risks associated with each financing method, supported by academic references.

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Advantages and shortcomings of alternative financing tools
Various financing tools available to Khayelitsha Cookies and their advantages and
shortcomings are as follows –
Bank loan – bank loan is the amount borrowed for the set period within the agreed schedule
of repayment. However, the amount of repayment depends on the duration and size of loan
and interest rate. Many of the businesses utilise bank loans as suitable part of financial
structure. In reality, the bank loans are available for growing and well-established businesses
rather than the start-up one. The reason behind this is the risk factor. Banks prefer to provide
the loan to the businesses with established profitability track record as it will enable them to
make the repayment with interest on time (Greenbaum, Thakor & Boot, 2015). If the fund is
obtained through bank loan Khayelitsha Cookies can achieve the following advantages –
 The business will be guaranteed the amount for certain period of the time that is
generally 3 to 4 years
 Loans can be matched with the lifetime of equipment or other assets for which the
loan will be taken for
 Rate of interest will be fixed that will enable the company to forecast the payments for
interest.
 As the bank loan is offered in exchange of interest payment, the company is not
required to provide the business share in exchange of the loan (Rostamkalaei & Freel,
2016).
However, various disadvantages associated with bank loan are as follows –
 Security – bank loan requires security that is generally provided to bank over the
business assets. In case of business failure bank has the 1st call on the asset left with
the company. As Khayelitsha Cookies is already running in loss if it raises through
bank loan in case of liquidation shareholders will be hardly left with any amount.
 Cash flow problem – the company may face issues in monthly repayments if the
customers do not pay the amount in time, which in turn lead to cash flow issues for the
company (Rostamkalaei & Freel, 2016).
Social venture capital – the main objective of social venture capital is to invest in companies
in socially responsible approach those are looking for providing real changes in social aspect.
It generally focuses on the companies that focus on resolving the social and environmental

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issues like poverty alleviation (Cao et al., 2018). Advantages of raising finance through social
venture capital are as follows –
 Relaxed model for repayment – as under social venture capital the repayment schedule
is relaxed the businesses can focus into the essentials at initial period.
 Sufficient and quick funding – it provides sufficient and quick funding to the social
enterprises. Further, it understands the view point of the entities and provides initial
required capital for starting the projects.
 Additional advantages – the additional advantage associated with social venture
capital is that the conditions attached with obtaining the capital is better as compared
to other tools (Grilli, Mrkajic & Latifi, 2018).
Disadvantages of raising finance through social venture capital are as follows –
 Financial return – as the investors emphasize on the financial returns along with the
particular social requirements criteria for attracting the investment is challenging. The
company may struggle with regard to investor’s finding those are willing to invest.
 Flexibility – there may be flexibility issues if the company is required to identify
structure for leveraging the capital. The reason behind this is the inability in providing
clear strategy for exit as the companies are generally focussed on the creation of long-
term impact (Grilli, Mrkajic & Latifi, 2018).
Crowd funding – it is using small capital amounts from large number of individuals for
financing the new or growing business venture. It enables easy accessibility of wide networks
of the people through the crowd funding websites and social media for bringing entrepreneurs
and investors together who has potential of expansion (Kirby & Worner, 2014). Various
advantages of crowd funding are as follows –
 Market validation – it is one of the moist convincing reasons for trying crowd funding
as compared to alternatives. Further, through crowd funding the borrower can set up
the pre-orders for the concept and minimise the risk associated with building of the 1st
batch.
 Exposure and legitimacy – most of the well-known platforms for crowd funding
provides the borrower with legitimacy of being scrutinized which in turn will expose
the borrower in their community (Kuti & Madarász, 2014).
Various disadvantages of crowd funding are as follows –

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 If target amount is not reached the potential investors will get back their money and
business will go away with empty hands. Further, failed projects damage the
reputation of business and the people who invested their money with them
 An entity with limited networks, no social media or digital presence or with
complicated product will find it difficult for crowd funding (Kuti & Madarász, 2014).

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Reference
Cao, Q. L., Xiang, H. Y., Mao, Y. J., & Yang, B. Z. (2018). Social capital at venture capital
firms and their financial performance: Evidence from China. arXiv preprint
arXiv:1810.02952. Retrieved from https://arxiv.org/abs/1810.02952
Greenbaum, S. I., Thakor, A. V., & Boot, A. (Eds.). (2015). Contemporary financial
intermediation. Academic Press. Retrieved from https://books.google.co.in/books?
hl=en&lr=&id=ZDzLAwAAQBAJ&oi=fnd&pg=PP1&dq=Greenbaum,+S.+I.,
+Thakor,+A.+V.,+%26+Boot,+A.+(Eds.).+(2015).
+Contemporary+financial+intermediation.
+Academic+Press.&ots=kWvArXLplT&sig=Jhf1U9y52TrGmnUEO80GDPlR1u0#v=
onepage&q=Greenbaum%2C%20S.%20I.%2C%20Thakor%2C%20A.%20V.%2C
%20%26%20Boot%2C%20A.%20(Eds.).%20(2015).%20Contemporary%20financial
%20intermediation.%20Academic%20Press.&f=false
Grilli, L., Mrkajic, B., & Latifi, G. (2018). Venture capital in Europe: social capital, formal
institutions and mediation effects. Small Business Economics, 1-18. Retrieved from
https://link.springer.com/article/10.1007/s11187-018-0007-7
Kirby, E., & Worner, S. (2014). Crowd-funding: An infant industry growing fast. IOSCO,
Madrid. Retrieved from http://www.memofin.fr/uploads/library/pdf/Crowd-funding-
An-Infant-Industry-Growing-Fast[1].pdf
Kuti, M., & Madarász, G. (2014). Crowdfunding. Public Finance Quarterly, 59(3), 355.
Retrieved from
https://search.proquest.com/openview/a956a38633042217cb0389ba9b36f0b3/1?pq-
origsite=gscholar&cbl=2046130
Rostamkalaei, A., & Freel, M. (2016). The cost of growth: small firms and the pricing of bank
loans. Retrieved from Small Business Economics, 46(2), 255-272.
https://link.springer.com/article/10.1007/s11187-015-9681-x