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Table of Contents

Finance – Funding For New Business - Part 3

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2.3 Bank Capital

According to Vistage International Ltd. (2013), traditional means of financing new companies give in the place to the means that used to be considered less traditional. Also, the changes in banking field were also outlined. Thus, before the crisis of 2008, the large banks dominated at the financial market of UK. The large banks used a traditional approach to lending when loans were supported by a borrower’s assets. The approaches to taking risks were significantly re-considered after the financial crisis of 2008.

Davis (2012) stated that banks do not meet funding needs of UK SME anymore. There is a tendency of large insurance companies to invest in new large corporations directly. Besides, Davis (2012) stated funding the new companies will help revive the UK economy. However, SME market was ignored by the providers of the new sources of funding. Davis (2012) aimed to identify the gap in funding the new start-ups in UK and reveal the problems that exist in this area.

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Gray (2013) shed light on the problem related unwillingness of the banks to finance new enterprises including SME. However, Gray (2013) examined several studies stating that SME received external funding without any constraints. The outcomes developed by Gray (2013) are based on the national survey of 2012 related the responses of SME owners. From 90% of SME attained bank loans in 2008 only 74% remained as of 2011. As well as Davis (2012) Gray (2013) marked out the importance of finding new sources of funding the new businesses.

Mason, Michie and Wishlade (2012) also concerned the problem of alternative financing of new SME in UK. Mason, Michie and Wishlade (2012) focused on the research of new financial instruments that could help develop appropriate funding of new SME in UK. Besides, Mason, Michie and Wishlade (2012) analyzed the accessibility of new financial resources to new SME. In addition, the research conducted by Mason, Michie and Wishlade (2012) showed that regionally-focused instruments are not oriented on venture capital.

Korosteleva and Mickiewicz (2010) presented a study examining start-up financing processes in 54 countries of the world. The surveys for 2001-2006 were used in this research. As the results, the researchers found that financial liberalization increased financial size of the new companies in spite of the sources of financing. The impact on total volume of financing start-ups was also examined by the authors.

Sameen and Quested (2013) stated that the results of their research showed the tendency to financing assets through equity. The firms that are growing fast tend to finance their assets through either long-term or short-term debt. Sameen and Quested (2013) emphasized the necessity to finance intangible assets using the new models of business.

Nofsinger and Wang (2009) considered angel investing and initial capitalization stages based on the survey of the firms from 27countries. Nofsinger and Wang (2009) examined types of financing, amounts, and the sources of financing. It appeared that informal investments are often used to fund the new start-ups.

Thus, Bank Capital has been the most traditional source of fund for startups. In various countries and at different periods of time, however, there have been problems for new businesses in procurement of funds by this source. There have been attempts to identify the reasons for these and we have the results which give a somewhat direction on what the causes might be. Based on such findings, the bridge between starters and bank capital shall be narrowed to solve the financial resource procurement problem of businesses.

2.4 Approaches to Making Capital Investment Decisions

Chittenden, F. and Derregia, M. (n.d.) offered an insight related to the problem of capital investment at the firms of different sizes. The study revealed differences between capital budgeting practices used by average performing enterprises and entrepreneurial firms. Chittenden, F. and Derregia, M. (n.d.) found out that the majority of the firms use discounted cash flow method together with the payback method when making investment decisions. The use of payback method is conditioned by the fact that modern business requires quick payback period. This method if often used to calculate payback period for the new companies as it helps indicate payback period.

Loudermilk and Steinberger (2002) argued that identification of effective investment opportunities is crucially important when starting-up a business. Loudermilk and Steinberger (2002) offered a comprehensive framework for choosing appropriate investment methods. It could be useful when starting a new company and help choose the financing approach.


GAO (1998) offered several approaches to decision-making process in capital investment. Also, the issues of increasing efficiency of capital investments were raised. GAO (1998) presented the analysis of the processes of selection, evaluation, and monitoring of investment decisions on government basis. These practices can be used for evaluation of capital investment decisions and developing strategies.

It is mandatory that new businesses are able to satisfy the needs of lenders in the form of desirable returns in the future, in order to gain the required funds. It is also necessary on the side of the investor to analyze the scope and interest in the new startup using appropriate measures of capital investment decisions.

3. Statement of the problem

Funding a business is a complex issue. A new business owner should identify whether he or she is willing to finance the new business with the help of equity or debt. Each of the funding methods has its advantages and disadvantages. Equity financing allows business owners avoid making large loan payments. Investors may offer valuable business assistance to the new business owner in the case of need, as they are interested in the success of the venture. If all risks are clearly explained to the investors, they will understand if the business fails. However, the investors will own a part of business proportionally to their shares. Also, the new business owner will not be able to exercise full control over his or her own business. On the contrary, debt financing allows its owner to have control over business and the owner of the business can distribute profits by himself. Besides, loan payments are tax-deductible and can help lower tax liability. The lenders do not share the profits generated by the new business. However, there are certain disadvantages of debt financing as well. The main disadvantage is that the owner should make the loan payment when start-up costs are needed. If the new business owner fails to meet the schedule of payments, the credit rating of the new venture may decrease. Also, commercial banks may require additional guarantees in the form of personal assets from the small business owner to make sure the payments will be made at full or the body of the loan will be paid off in the case of bankruptcy. Besides, the use excessive debt financing increases the risk of bankruptcy. In this paper I will try to find out which type of financing is better for the new business. Also, preferable type of financing will be outlined for starting up new businesses in different industries.

The current research aims to reveal potential sources for funding a business based on analysis of primary and secondary data. Finding the financial sources for funding a new business is one of the most important stages of any venture. The main problem is to find out whether debt of equity financing is more appropriate for fulfilling organizational goals.

4. Objectives

The objective of this study is to discuss the different funding options that newly established businesses can consider. The discussion will be backed up with primary and secondary information. Given that information, I gather primary and secondary data, which is then analyzed in order to present evidence and literature-backed findings and discussion about the topic. Aside from being backed with both primary and secondary data, I also present the discussion using both qualitative and quantitative research information, which is based on numbers and thorough analysis of all possible relevant underlying issues.

The primary objective of the current research is to find out which funding method is better for the new enterprise. The secondary research objectives are to find out which funding sources are better for the different types of enterprises.

The current research will attempt to answer the following questions:

  • What is the best form of funding a new business from cost minimization perspective?
  • What are the advantages and disadvantages of debt and equity financing for a new business?
  • Which type of financing is better for starting up new businesses in different industries?

The analysis of the answers will give an idea of the contemporary trends in funding in different industries in the United Kingdom. This research can be useful for fantasists, investors, and existing and potential business owners. Also, the results of the research can be used for comparison between funding methods used in the U.K. and in other countries to make conclusions related the most effective approaches to forming venture funds.

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5. Outline of subsequent chapters

  1. Research Methodology
  2. Introduction
  3. Measurement variable and issues
  4. Research Model
  5. Sampling Procedure
  6. Methods of date analysis
  7. Secondary analysis
  8. Date analysis plan

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