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Different Types of Business Financing Case Study On: Great Service Cleaning and Maintenance Company
Different Types of Business Financing Case Study On: Great Service Cleaning and Maintenance Company
Many companies seek means to provide the much-needed finances to grow their businesses.
The financing models could be through debt financing, share ownership, private buy-out,
public debt or public common stock. This paper will look at each alternative, highlighting the
pros and cons of each. The paper will also look at the best alternative for Great Service
Cleaning and Maintenance Company which requires a capital infusion of $200,000 as the
case study
Private debt financing occurs when a firm or individual raises money from private sources to
fund operations, make an acquisition, or finance a project. The private investor(s) will lend
the money in exchange for bonds, bills, or notes issued by the borrower. (familyoffices.com).
This kind of financing is appreciated by many small, medium sized business for their growth
because it eliminates the need to surrender equity to the outside investors. Other reasons for
this kind of borrowing is low borrowing costs, financial certainty because interest rate and
dates of payments are set. Tax advantage because the amount you pay in interest is tax
deductible, effectively reducing your net obligation (www.thehartford.com), the cons for this
kind of financing is that there are Qualification requirements. You need a good enough credit
rating to receive financing. You also need to have Collateral which must be provided to the
lender, and this means that should put some business assets at potential risk. You might also
be asked to personally guarantee the loan, potentially putting your own assets at risk
(www.thehartford.com) For Great Service Cleaning and Maintenance Company going this
route will require them to provide the collaterals such as the buildings, however the
ownership of the company will still be returned by them unless they fail to pay the debt
In this financing model, you seek the investors who will invest in your company. in
exchange for the money they invest now, investors will receive a stake in your company and
its performance moving forward. The beginning point is to know the value of the company
and based on that valuation and the amount of money an investor gives you, they will own a
percentage of stock in your company, for which they will receive proportional compensation
once your company sells or goes public. (www.fundable.com). This kind of financing has got
1. You don’t have any collateral required for private debt financing
2. When you’re positioned for astronomical growth and you don’t seem to have the
needed capital.
3. When you are starting a high capital-intensive business proposal from the scratch.
1. Equity investors expect big rewards for big risks. The fact that investors have
pumped in the money in your business, they certainly expect big reward. They’re
exchanging more risk for more reward—a lot more—and they’re going to want to see
results
2. Equity narrows your options: Choosing the equity route significantly narrows your
options when it comes to the future of your company. Equity investors are interested
in one thing: liquidity. That means they won’t be satisfied with a cut of your profits
each year. Once you’ve accepted their money, they will expect that endgame for your
3. It takes time to raise the equity capital. Perhaps the minimum expected is 3 to
6months.
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For Great Service Cleaning and Maintenance Company, this option will put their stake in the
company at risk should they fail to operate at the profit desired by the investors.
with acquisition.(Kenton July, 2018). By acquisition of controlling interest means that one
party buys all or the majority of a company’s shares(at least 51%) in order to gain control of
the management of the firm buys the stake or leverage buyout if debts are used to fund the
1. Efficiency. A buyout may get rid of any areas of service or product duplication in
2. Reduced Competition if the company buys its competitor resulting into profitability.
1. Increased debt. The acquiring company may need to borrow money to finance the
getting on board all the liabilities of the other company being bought.
2. Integration. Integration of the personnel and procedures of the two companies is going
to take time. Even though the two companies may be doing comparable things, they
(corporatefinanceinstitute.com).
3. Managing the Current Owner’s Departure. Striking the right balance between letting
the new owners take the reins and ensuring that vital company information and
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contacts are not lost with the departure of the current owner
(www.sellingmybusiness.co.uk)
For Great Service Cleaning and Maintenance Company, just as explained this approach
immediately dilutes their control of the company and may not be able to make the decisions
This is the financial obligation that allows the issuer to raise funds by promising to repay the
lender at a certain point in the future and in accordance with the terms of the contract. (Chen.
J). A company can issue a corporate bond and sell it to the investors and receive the
necessary funds that they need as long as they can show the company capabilities to pay the
investors’ money from their future operations earnings. This option will give a company
1. Their shares will not be diluted. The shareholding will be returned among the family
members
2. Corporate bonds generally come with the fixed -rate interest hence they will provide
future financial stability for Constantine Grocery and shield the business against
3. Corporate bond will enable Constantine Grocery to retain more cash in the business -
because the redemption date for bonds can be several years after the issue date.
(www.nibusinessinfo.co.uk)
However there are some disadvantages that the Company need to be aware of if they go this
1. regular interest payments to bondholders - though interest may be fixed, the interest
2. The potential for the business' share value to be reduced if the profits decline - this is
potentially long period of time, they can impose certain covenants or undertakings on
(www.nibusinessinfo.co.uk)
This is where a Company which is a private company will list its company on the stock
exchange and sell some of its shares to the public. The first implication to this approach is the
dilution of Shares. The Company will no longer be a privately-owned business, but it will be
a public owned company. However, the better side of this approach is that Issuing common
stock in the financial markets is an alternative to issuing debt. Rather than adding more debt
to a company's balance sheet, which is a financial statement, and budgeting for the servicing
of debt, a company can take a less expensive route and issue common stock. With stock, an
organization does not need to make obligatory interest payments to investors and instead can
make discretionary dividend payments when it has extra cash (Terzo. G 2018). If the
Company has to sell Common shares as a way to raise the needed capital, then they have to
Coming back to the company in question Great Service Cleaning and Maintenance Company.
If this company manages to get the $200,000 by using which ever financing model, then this
company financial outlook will look positive in the initial stages. For example, suppose the
company sold common stock to raise these funds. Then key financial KPIs like Profitability
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measure, Short-term liquidity as well as long term solvent measure will improve. This
amount will be treated cash inflow as well as assets in cash form. Therefore Gross margin
ratio will improve from 23% to 24%, (2, 396,900/ 9,900,000). The profit margins will move
from 9% to 10%, While Return on asset will jump from 13% to 17%. In terms of short term
liquidity, the company will be at 1.64 to 1 from the 1.47 to 1 that we calculated in unit 1. The
long-term solvency measures the debt to asset ratio will from 63% to 61%. All these figures
show the impact of injecting in, $200,000 in this business and in my view Common stock is
REFFERENCE
https://www.mergersandinquisitions.com/
Geri Terzo, 2018, Pros & Cons of Issuing Common Stock retrieved from
https://smallbusiness.chron.com
Raise long-term funding through debt capital markets retrieved on 22nd December 2018 from
https://www.nibusinessinfo.co.uk
The Types of Investor funding retrieved on 1st January 2019 from https://www.fundable.com
Advantages and Disadvantages of a Management Buyout Retrieved on 1st January 2019 from
https://www.sellingmybusiness.co.uk
Advantages vs. Disadvantages of Debt Financing Retrieved on 1st January 2019 from
https://www.thehartford.com
Heisinger, K., & Hoyle, J. B.(2012). Accounting for Managers. Creative Commons by-nc-sa
3.0. Chapter 13
Private Debt Financing Retrieved on 1st January 2019 from https://familyoffices.com
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