For each of the following scenarios, identify the type of financing from the options provided that you believe to be most appropriate.  Be specific, and briefly explain your choice.    Options:...

For each of the following scenarios, identify the type of financing from the options provided that you believe to be most appropriate.  Be specific, and briefly explain your choice.  

 Options:

Short term financing options- self-financing, credit cards, trade credit, commercial paper, factoring

Short term loans and grants- business line of credit, peer to peer lending, micro-loans, grants

Long-term financing- securities, debit financing, equity financing

Financing with bonds-leverage

Financing with equity-venture capitalist, stock 

  • Jose started his retail florist business ten years ago.  His business has always paid its bills on time.  In preparation for the Valentine's Day rush, Jose needs to order a large shipment of roses from his regular supplier.  Valentine's Day is in one month, and Jose is short on cash. 
  • Linda owns a small printing business that does $750,000 in annual sales.  Her company has been in business for seven years and earned a healthy profit each year.  Since Linda has previously reinvested the profits to grow the business, she has limited cash on hand.  She would like to purchase a state-of-the-art printing press for $200,000. 
  • Bill, in his late thirties, has worked himself up from handling mail to being an agent for a well-known entertainment agency.  He now represents several famous musicians.  To help his clients get jobs, Bill uses bite-sized chocolate chip cookies as calling cards.  His aunt taught him how to bake cookies when he lived with her as a teenager.  Before Bill dropped out of high school, he was pursuing vocational training in the food trades, but he has never run his own business.  Some of Bill's friends in the entertainment industry have encouraged him to open a store that would sell his cookies. His cookies would look and taste very different than the cookies sold in the grocery stores today.  Unfortunately, Bill has only half of the $500,000 he would need to open a store.

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justaguide | College Teacher | (Level 2) Distinguished Educator

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Jose has been in business for 10 years and has been able to always pay his bills on time. For Valentine's day he needs to place a large order for a shipment of roses from his regular supplier. Jose is short on cash but would have the required funds in hand within a month. Here, he requires a short term financing option. From the list provided, the ideal option would be a trade credit from his supplier. Trade credit refers to credit given by one business to another that is making a purchase and allows the buyer to repay the required amount after a short duration of time. The supplier shouldn't have a problem in extending this facility to Jose looking at the previous payment history and also because Jose is placing an order for a larger number of flowers than he does usually. It is also known that there is a large demand of roses on Valentine's day and as a result Jose shouldn't have a problem in selling the roses that are being bought using the credit line he has been given.

Linda owns a small printing business that does $750000 in annual sales.  Her company has been in business for seven years and earned a healthy profit each year. Linda has grown her business by reinvesting the profits earned. She requires credit to purchase a state-of-the-art printing press for $200000. There are several options that Linda could consider and choose from. She could apply for debt from a bank. Looking at the fact that the business has been running successfully and making profits for the last seven years, she is very likely to get a loan at a relatively low rate of interest. Linda would make a very good customer for a bank; there is a relatively low risk that her investment in the new printing press turns out to be a loss making one and which would lead to her defaulting on the loan repayment. The amount she requires as a loan is also quite low compared to her annual sales. Though Linda could also finance her purchase using the equity option, this is an option to be considered only if she wishes to dilute her skate in the business.

Bill, in his late thirties, has worked himself up from handling mail to being an agent for a well-known entertainment agency.  He now represents several famous musicians.  To help his clients get jobs, Bill uses bite-sized chocolate chip cookies as calling cards.  His aunt taught him how to bake cookies when he lived with her as a teenager.  Before Bill dropped out of high school, he was pursuing vocational training in the food trades, but he has never run his own business.  Some of Bill's friends in the entertainment industry have encouraged him to open a store that would sell his cookies. His cookies would look and taste very different than the cookies sold in the grocery stores today. Bill requires $500000 to open his store. The best option for Bill is to find a venture capitalist. Venture capitalists are always eager to invest in new businesses started with an idea that they consider to be one that will allow the business to make profits in the future. Bill would have to create a business plan and highlight why it is extremely likely that he makes a profit by selling the cookies that he has created. It is up to him to convince a venture capitalist of the financial feasibility of his new idea. He is unlikely to get financing using any of the other options given.

Sources:

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