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i) Outside investors expect the business to deliver value, helping you explore and
execute growth ideas.
ii) The right business angels and venture capitalists can bring valuable skills,
contacts and experience to your business. They can also assist with strategy and
key decision making.
iii) External investors always have a vested interest in the business' success, i.e. its
growth, profitability and increase in value.
iv) Investors are often prepared to provide follow-up funding as the business grows.
v) Preserving your resources - external funding allows you to use internal financial
resources for other purposes. If you can find an investment that has a higher
return than the interest rate on the bank loan your company just secured, it makes
sense to preserve your own resources and put your money into that investment,
using the external financing for business operations. You can also set aside your
internal financial resources for cash payments to vendors/suppliers, which can
help improve your company's credit rating.
vi) Growth – External funding allows firms to finance growth projects the company
could not fund on its own. For example external financing can help you get the
funding you need to build a bigger manufacturing plant if demand for your product increases. External funding can also be used for making large capital equipment purchases to facilitate growth that the company cannot afford on its own. vii) Greater Economies of Scale - Large businesses are generally more efficient than small ones. They have a greater bargaining power with suppliers and they can spread their fixed costs, such as administrative expenses, over larger sales. This results in lower costs per unit of production, which, in turn, gives the company a competitive edge in the marketplace. External sources of finance help a company grow faster, achieving the economies of scale necessary to compete with the rival firms on regional, national, or even international level. viii) Leveraged Returns - External sources of finance also leverage the returns for the entrepreneur. If, for example, an entrepreneur starts a business with the return on investment rate of about 20 percent, providing USD 100k of her own money as the seeding capital, then, if no external sources of finance are used, her return should be about USD20k (20 percent * USD100k) a year. If, on the other hand, she takes a bank loan with an interest of 10 percent in the amount of another USD100k, then the overall return from her business will be USD200k * 20 percent = USD40k, of which USD10k will be the bank's interest (USD100k * 10 percent). The leveraged return our entrepreneur will get is, then, UUSD30k.
Kavungya answered the question on March 26, 2019 at 06:56