Question

Suppose you own a new business and after a few rough years you now are making a solid profit of $150,000 per year and have built up some savings as well. While your business is successful, you realize that in order to expand and remain competitive you are going to have to raise a lot of money to invest in some new machinery and new stores. You have to decide between using your savings to finance your expansions and machinery upgrades, taking out a bank loan, or selling a portion of your equity to new investors. Explain the pros and cons of each of these three options in this situation.

Answer 1

Using your savings

Pros:

Your are the sole owner.

You can make your own decisions

100% profit belongs to you.

You will have the authority to make decisions.

Cons:

Capital raising can be limited.i.e only small amount can be used as whatever savings u have you will use it.

Very risky.

If loss occurs you have to bear 100%.

Taking a bank loan

Pros:

Need not to spend your whole money.

Lot of money will be raised.

Cons:

Every month interest has to be paid.

You have to repay back your loan

Bank will ask for surity of your assets.

Selling a portion of your equity

Pros:

Lot of money you can raise

New investors will have lot of expertise and it will help in expanding business.

Expansion is unlimited,

Cons:

Ownership will be diluted.

You are not the only one to make decisions.New investors will also have a say.

Profits will be shared.