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Pros and Cons of Funding Sources

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Contents

  • Part1
  • Description about the Business
  • Available Institutions to Fund a Small Start-up Company
    • Venture capital
    • Pros and Cons of Venture Capital Financing
    • Small Business Administration
    • Pros and Cons of SBA
    • Private Equity
    • Pros and Cons of Private Equity
  • Part2
  • Reason behind Choosing Venture Capital
  • Attractiveness of this venture
  • References
  • Bibliography
  • Appendices

Part1.

Description About the Business

The business is about opening a fitness center in Manchester. The fitness center will be situated at the north of University of Manchester. There are other fitness centers like Manchester Aquatics center, Trinity Sports center, Manchester Central Personal Training, Jodie O’Neil fitness Coaching, Ardwick Sports Hall, Momentum Leisure Club. But the fitness center will possess some unique features which will distinguish itself from its competitors. The fitness center is totally focusing on the customer needs and demands. The fitness center is mainly featuring four activities like spinning class, Boxing, Climbing, Dancing class.  These four activities were chosen based on the market research done among the students.

From the above table it can be seen that nearly 160 of the total respondents like climbing wall as this activity will bring a sense of achievement among them. 140 of the total respondents like dancing class. Climbing wall and dancing class are the two highest voted activities that this fitness center is providing. In case of dancing class, based on the research it is providing yoga, Pilates, belly dance and aerobics and some modern dance like Jazz. Yoga is the most popular dance among those. More than 130 students like spinning class. 15 bicycles will be there in spinning class and the fitness center is suggesting the members to make advance reservation. The atmosphere will be as night club which will boost the energy of students. Apart from these full size rings for boxing and large screen will be provided which will help the young people to release stress.

Pros and Cons of Funding Sources

Available Institutions to Fund a Small Start-Up Company

When a company is yet to be formed, it tries to raise long term finance from different sources. There are mainly three types of sources from where a company can get it startup capital for long term during its inception period. Some of the funding bodies which may finance our venture are as follow:-

Venture Capital

A young private company that is yet to start and not yet ready to go for public offerings may seek for a venture capital financing. Here comes the venture capitalist that is prepared to finance an untried concept that appears to have promising prospects. Venture capital funds support growing firms during their inception stages and before they are going for initial public offerings of shares. Firm will get venture capital as a form of equity capital. It represents a highly risky investment in the hope of earning higher return in future. It is expected that this concept will have a greater significance in the years to come. It typically invests into equity or quasi equity instruments in financial market which will be able to share the risk and profit of the investee firm.  Venture capitalist not only invests in the new company but also guides the firm actively in taking major decisions. Financial burden of the assisted firm tends to be low. Venture capitalist normally close it position by liquidating the investment from the assisted firm after 7 years. (Chandra, 2011, p.436). Thus it can be said that it may help our fitness center funding.

Pros and Cons of Venture Capital Financing

The main important advantage of venture capital financing is the venture capitalists gamble on the new company. If the new succeeds they earn high rate of return but if the new idea fails then they absorb their losses. In case of bank loan the new firm would have to repay but here no obligations. If the business fails the new firm won’t have any burden on them. Beside this venture capital also help to grow business quickly. Without a venture capital financing the new business may have to wait for steady revenue before hiring additional staff or to purchase a new expensive equipment. But here the venture capital helps it. The company can promote new steps. Venture capitalists can also improve network of the new company by connecting the new firm to other business leader who can help the company for better. Actually venture capitalists are the successful entrepreneurs in their field and they have a rich base of contact which is very important for a new company. As the venture capitalists have a share in the new business, thus it’s also their interest to improve the network of the business with rich investors who might become more profitable for the business (Cetindamar, 2003, pp. 29-30).

Every coin has two sides. Similarly there are also some disadvantages of venture capital financing. Venture capitalist owns a large portion of stake in the new company. Although the new company need not to repay the money of the investors but it has some limitations. Venture capitalist invests his money in exchange of shares of the company. This reduces the number of shares in the hand of the founder of the company. Venture capitalists also have right to take managerial decisions in the company depending upon their holding stake of the company. Beside these the new company may not be ready enough to grow further like accepting funds before understanding that how much the new business is profitable on its own can be dangerous for the business. The promoters of the business may end up with spending lots of money in things that will not help the company to grow in long run.  Sometimes heavy investment in resources is a main reason of failing of new business.

Small Business Administration

SBA helps to facilitate loan for a new business venture like our fitness center through a third party lender or helps the business to find venture capital financing. It provides various types of financial assistance for the business which are effective and are designed to meet key needs. It includes debt financing, bonds, equity financing. In case of debt financing, SBA does not provide loans directly to the business. But it sets the guidelines for the requirement and then it is lent by lenders, micro lending institutions etc. guarantee of the loan is given by the SBA. Thus a SBA loan is similar to a commercial loan for a business. It is better to check the present guarantee requirements before seeking assistance. SBA also provides venture capital program with a partnership of public and private (SBA, 2013). It can also be a perfect funding body for our proposed venture.

Pros and Cons of SBA

The main important advantage of an SBA is that if the company treats the SBA loan properly then its chance of getting bank loan gets easy. SBA also acts as a helper to improve the relationship between local lender and borrower.

But as others, it also has some disadvantages like it doesn’t invest directly in the new business. Loans are provided by the third party lender to the new business. Thus it acts as a commercial loan to the new business and the business venture has burden of repaying the loan. Apart from these SBAs also sometimes ask for previous year data.

Private Equity

Private equity has become an integral part of the financial services industry in the world in last two decades for funding in small new business. Partnership and mutual dependence have become the basis of the relationship between private equity investors and investee companies. Like the venture capital financing, private equity investment company also invest in those companies that are not ready yet to raise finance from public. Private equity companies are those which have their own pools of capital invested by different institutions or  high net worth individuals and run by such managers who have deep knowledge in financial market linked to the performance of the funds. Private equity companies have their own set of written agreements upon which they judge the investee companies. They also participate in board meetings and can take managerial decisions (Chandra, 2011, p.437).  It can also be considered as the potential funding body for fitness center.

Pros and Cons of Private Equity

The main important of private equity investment is that it involves introducing a new partner to the business that will share the responsibilities of the business and help in the managerial decisions.  The private equity company will invest in the company and will be responsible for the profit and loss. Private equity also helps the company for its expansion. The new company will get more leverage as the borrowing capacity of the business will increase.  Beside this it also helps the business to raise equity at higher price and private equity firms also the help the new company by bringing additional skills and new business networks that will be more profitable for the new company (Benjamin, 2000, p.27).

On the other hand, private equity firm also has some kind of limitations. The promoter of the new company is accountable to the private equity firm for any kind of major decisions. Control over the business gets diluted and the promoter also can’t directly access to the cash flow as it may cease the new business. But in contrast to venture capitalist, private equity investors come mostly at later stage of operations when the company has a substantial operating history. Apart from this private equity investors put more emphasis on corporate governance.

The funding body which I have chosen as the best potential one for our fitness center is Venture Capital.

Part2.

Reason Behind Choosing Venture Capital

From the above funding bodies those are available to fund a new startup business venture; Venture capital financing will be the most appropriate for this business venture. There are some reasons behind choosing Venture capital financing to invest as a funding body for this business venture. Venture capital firms are willing to take risk on the new company and they also share the risk and reward of the company. If the company fails then venture capitalists eat up their losses. But in case of SBA loan the new firm always has a pressure on their head about repaying the loan. As this business needs to raise 100000 pounds to fund the business venture that’s why it necessary to find a proper funding which will provide this much of amount to fund the new business. With the help venture capital financing, this business will be able to acquire 100000 pounds of capital that might be not possible through private equity or banks. Because as discussed earlier private equity firms comes mostly at the later stage of the business when the business already has some operational experience. Thus it will not fit for this business venture as it has not started yet. In case of SBA loans, there will be a burden over the head of the promoters of the business as the SBA will not take the responsibilities of risk and losses. Beside these venture capitalists will also provide more skills and knowledge and expertise related to the field of fitness center. They will also provide better industry networks that will be valuable for the business venture in the future. Venture capitalists will also be involved in the decisions regarding the strategic direction of the company which will enrich this venture with more resources.  Thus for these advantages venture capital financing will be the most suitable body to finance this business venture rather than other funding bodies.

Attractiveness of This Venture

The venture of fitness center has certain unique features for which the chosen funding body will be ready to fund our venture. The fitness center will be situated in Manchester near to the university campus. Other competitors will be around the place. But the fitness center will possess some unique features like the center is totally focusing on the customer satisfaction. It has created based on the customers’ needs and demands. Main features are:- spinning class, boxing, wall climbing, dancing class. These four were chosen based on the four highest votes of the students who are the main target consumers of the center. According to the data provided, nearly 160 of the total respondents like climbing wall as this activity will bring a sense of achievement among them. 140 of the total people like dance class. The center is also providing top five dancing style. Main attraction of spinning class will be its atmosphere which will be like a night club with various facilities which will boost the energy of the members. For young generation boxing is a way for releasing their pressures. Large boxing ring with large visual screen will be provided. To fund this business venture, 100000 pound startup capital is needed. Here, the estimated cost of starting the venture is provided.

Start-up Expenses
Legal 1,000
Insurance 3,000
Rent 3,000
Decoration 2,000
Marketing 7,500
Staff Training 6,400
Other 2,000
Total Expenses 24,900

 

Operational Assets
Spinning bikes: 13,000
Boxing ring + Equip: 9,000
Climbing Wall: 10,000
Dancing class equip: 2,000
Total Assets 34,000

 

Other Assets
Tables, chairs, office 10,000
Surveillance system 2,000
Technology (card system) 4,000
Total Assets 16,000

 

Apart from the staff salaries, above are the initial startup costs of the venture. But the main attraction of this business is that growth rate of the fitness center in UK is 6% and as the proposed business venture will start around the university campus, students will get a better access to the fitness center, and it is expected that by the year 2018, the number of students will be more than 170000. Thus, the fitness center will have a chance of earning profit. Products will also be sold at a margin of 15% and breakeven point will be earned in 7.5 months as estimated. Thus it will be profitable for a venture capital firm to invest in this project because the project will start to earn profit by December 2015. Thus the venture capital firm can end up its position with 3 years by earning profit. Beside this as estimated its cumulated profit will have an increasing trend starting from 2015 with 46,320.95 pound to 222,280.35 pound in just three years at 2017. ROI of the projected investment will also be higher after June 2016. By December 2017 it will earn ROI of 122%. It has also focused on the 4ps of marketing that is Product, Place, Price and Promotion (Kotler, 2009, p.24). In case of Produce, as discussed earlier it has focused on the main four choices of the target consumers. The fitness will be situated at the north of the University of Manchester thus the 2nd P that is Place is very well chosen. For the 3rd P of the 4Ps which is Price, it has adopted a market penetration price where the price of the products will be lower than its consumers. It has also taken some promotional strategies to boost up the memberships like 20% of discount on joining in the first month, if any student brings two others for membership then he/she can get free membership for a month, free gift after joining, distribution of leaflets, campaigning with students union to spread awareness about the fitness center during sports events. Thus considering the above prospects from the research conducted of the new business of fitness center we will apply to venture capital firm and it can be said that if a venture capital firm invests into this venture it will be proven as profitable for both and it will be easy to get fund.

References
  • Chandra. P., 2011. Financial Management. India: Tata McGraw-Hill Education.
  • SBA, 2013, What SBA Offers to Help Small Businesses Grow. [online]. Available at: http://www.sba.gov/content/what-sba-offers-help-small-businesses-grow. [Accessed on November 28, 2013].
  • Kotler, P., 2009. Marketing Management. India: Pearson Education India.
  • Cetindamar, D., 2003. The Growth of Venture Capital: A Cross-cultural Comparison. USA: Greenwood Publishing Group.
  • Benjamin, G., 2000. Angel Financing: How to Find and Invest in Private Equity. USA: John Wiley & Sons.
Bibliography
  • Landstrom, E., 2012. Handbook of Research on Venture Capital. UK: Edward Elgar Publishing.
  • Chandra. P., 2009. Projects 7/E. India: Tata McGraw-Hill Education.
  • Brigham, E., 2013. Financial Management: Theory & Practice. Cengage Learning.
  • Kotler, P., 2008. Principles of Marketing. India: Pearson Education India.
  • Cendrowski, H., et al., 2012. Private Equity: History, Governance, and Operations. New Jersey: John Wiley & Sons.
  • Bartzokas, A., 2004. Financial Systems, Corporate Investment in Innovation. and Venture Capital. UK: Edward Elgar Publishing.
  • Metrick, A., 2011. Venture Capital and the Finance of Innovation. USA: John Wiley and Sons.
  • Gladstone, D., 2004. Venture Capital Investing: The Complete Handbook for Investing in Private Businesses for Outstanding Profits. New Delhi: FT Press.
  • Cumming, D., 2010. Venture Capital: Investment Strategies, Structures, and Policies. New Jersey: John Wiley & Sons.
  • Gregoriou, G., et al., 2011. Venture Capital in Europe. USA: Butterworth-Heinemann.

Appendices

Table 1. Projected Balance Sheet of the Fitness Center

December 2014 December 2015 December 2016 December 2017
Non-current Assets
Equipment  £        44,791.67  £        32,291.67  £        19,791.67  £          7,291.67
Total non-current Assets  £        44,791.67  £        32,291.67  £        19,791.67  £          7,291.67
Current Assets
Cash and cash equivalents  £        17,758.15  £      114,029.29  £      212,637.46  £      314,988.68
Total Current Assets  £        17,758.15  £      114,029.29  £      212,637.46  £      314,988.68
Total Assets  £        62,549.82  £      146,320.95  £      232,429.13  £      322,280.35
Equity
Share capital  £      100,000.00  £      100,000.00  £      100,000.00  £      100,000.00
Retained earnings -£       37,450.18  £        46,320.95  £      132,429.13  £      222,280.35
Total equity  £        62,549.82  £      146,320.95  £      232,429.13  £      322,280.35
Difference  £                    –    £                    –    £                    –    £                    –  

Table 2. Projected Income Statement of the Fitness Center

Dec-14 Dec-15 Dec-16 Dec-17
Sales  £ 152,226.00  £ 539,514.00  £ 571,884.84  £ 606,197.93
Cost of Sales -£  21,692.85 -£  76,431.15 -£  81,017.02 -£  85,878.04
Gross Margin  £ 130,533.15  £ 463,082.85  £ 490,867.82  £ 520,319.89
Other Costs -£166,983.33 -£351,388.00 -£376,056.92 -£400,518.27
Operating Profit -£  36,450.18  £ 111,694.85  £ 114,810.90  £ 119,801.62
Finance Income  £               –    £               –    £               –    £               –  
Finance Expense  £               –    £               –    £               –    £               –  
Profit before taxation -£  36,450.18  £ 111,694.85  £ 114,810.90  £ 119,801.62
Taxation -£    1,000.00 -£  27,923.71 -£  28,702.73 -£  29,950.41
Profit after taxation of the year -£  37,450.18  £   83,771.14  £   86,108.18  £   89,851.22
Cumulated Profit -£  37,450.18  £   46,320.95  £ 132,429.13  £ 222,280.35

Table 3. The projected cost of The Fitness Center

Pros and Cons of Funding Sources

Table 4. Projected sales of The Fitness Center

Pros and Cons of Funding Sources

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