Research Problem
Funding a business is a complex issue. A new business owner should identify whether he or she is willing to finance the new business with the help of equity or debt. Each of the funding methods has its advantages and disadvantages. Equity financing allows business owners avoid making large loan payments. Investors may offer valuable business assistance to the new business owner in the case of need as they are interested in the success of the venture. If all risks are clearly explained to the investors, they will understand if the business fails. However, the investors will own a part of business proportionally to their shares. Also, the new business owner will not be able to exercise full control over his or her own business. On the contrary, debt financing allows its owner to have control over business and the owner of the business can distribute profits by himself. Besides, loan payments are tax-deductable and can help lower tax liability. The lenders do not share the profits generated by the new business. However, there are certain disadvantages of debt financing as well. The main disadvantage is that the owner should make the loan payment when start-up costs are needed. If the new business owner fails to meet the schedule of payments, the credit rating of the new venture may decrease. Also, commercial banks may require additional guarantees in the form of personal assets from the small business owner to make sure the payments will be made at full or the body of the loan will be paid off in the case of bankruptcy. Besides, the use excessive debt financing increases the risk of bankruptcy. In this paper I will try to find out which type of financing is better for the new business. Also, preferable type of financing will be outlined for starting up new businesses in different industries.
The current research aims to reveal potential sources for funding a business based on analysis of primary and secondary data. Finding the financial sources for funding a new business is one of the most important stages of any venture. The main problem is to find out whether debt of equity financing is more appropriate for fulfilling organizational goals.
Problem Background
Funding a new business is a difficult issue. There are a lot of alternatives and options of funding a new business, but finding the best one is a difficult task. Starting a new business is usually connected with substantial financial resources. However, it can be inexpensive if a new entrepreneur knows how to organize financing and save on it. In order to find the right financial source for the new business one should possess certain skills and knowledge. I will undertake a research related finding financial sources for the new business by applying financial management approaches.
Theoretical Background
A theory of debt and equity will be used in the current paper to examine which sources of financing are better for a particular venture. The calculation of funding for the new venture will be based on the relative benefits of debt and equity financing.
The number of relevant literature was examined to work out an appropriate approach to the current research. Strauss (2011) provided a wide range of options related funding and raising capital for a new company in a highly competitive environment. Benjamin and Margulis (2013) touched upon the issue of how to organize private equity financing. Finkel and Greising (2009) compared advantages and disadvantages of debt and equity financing for the new enterprises. Debt market analysis was presented by Johnson (2013). Swanson, Srinidhi and Seetharaman (2003) provided a number of solution related balance between debt and equity financing. Marks, Robbins, Fernandez, Funkhouser and Williams (2009) offered a comprehensive research related capital structure. Finkel and Greising (2009) shed light on opportunities of fundraising, mastering private equity venture capital. Theoretical framework of company valuation was provided by Pinto, Henry, Robinson and Stowe (2010).
The results of the theoretical research will be compared to the results of empirical study in terms of types of financing (debt or equity, internal or external). The conclusions will be based on the results of comparison of theoretical and empirical research. Also, the trends in funding the new businesses can be outlined. The tendencies in funding the new businesses depending on the industry they operate will be analyzed as well. The advantages and disadvantages of external and internal funding as well as debt and equity financing will be evaluated within the framework of the current research.
Research Aims and Objectives
The primary objective of the current research is to find out which funding method is better for the new enterprise. The secondary research objectives are to find out which funding sources are better for the different types of enterprises.
Research Questions
The current research will attempt to answer the following questions:
- What is the best form of funding a new business from cost minimization perspective?
- What are the advantages and disadvantages of debt and equity financing for a new business?
- Which type of financing is better for starting up new businesses in different industries?
The analysis of the answers will give an idea of the contemporary trends in funding in different industries in China. This research can be useful for fantasists, investors, and existing and potential business owners. Also, the results of the research can be used for comparison between funding methods used in China and in other countries to make conclusions related the most effective approaches to forming venture funds.
Research Strategy
The research will be conducted with the help of the primary and the secondary research methods. Primary research will be conducted with the help of electronic survey of 200 entrepreneurs with relation to the funding methods used by them to fund the activity of the new ventures. Secondary research will be based on the review of the relevant literature. On the basement of the results of the current research an appropriate conclusions related funding sources of the new venture will be made.
The choice of the companies is random, but only national companies are supposed to be analyzed. The group reflects a relatively small number of entrepreneurs will be interviewed. Thus, the current research is subject to certain limitations, namely: small sample number, inadequate data for analysis, and inaccuracy of the research methods used. The research will be conducted on the territory of China.
Methodology
Both quantitative and qualitative research methods will be used for the purposes of the current research. After conducting a survey the funding patterns will be carefully analyzed with appropriate conclusions made regarding the preferable type of funding based on the theoretical and empirical research results. Examination of the survey questionnaires will help achieve the first research objective. The conclusions related the most popular types of funding from the cost minimization perspective will be made. Also, the business owners will be asked about the problems they faced when they had to choose the form of funding and benefits they received from chosen type of funding. The second research objective can be reached in this way. They will be asked about the industry they are operating to be able to answer the third research question. The data collected will be analyzed with the help of Excel. The following data analysis techniques will be used: hypothesis testing, generalization, and summarizing. Aiming to make the research results more accurate, open-ended question interviews will be conducted with the participants on the phone to have a better understanding of the research results and to receive more detailed information for analysis. The main conclusions resulted from the interviews are supposed to be used in the dissertation to support the research topic.
Data Collection
Data for the current research will be collected by sending questionnaires to 250 existing and new entrepreneurs. Further, in-depth interviews will be conducted aiming to polish the results of the current research. A self-composed questionnaire will be send to the potential participants targeting at least 200 business owners. For this purpose the questionnaire will be sent to more than 200 persons because some of them will not be able to answer the question or maybe will not have time or desire to answer the questions. The respondents are supposed to have their own business or started up their business during the last year. The questionnaires will be sent to the participants upon arrival at an agreement for participation.
Research Ethics
Questionnaires will be designed taking into account ethical considerations. The participants may not write their name if they want to stay anonymous. Data collected in the course of the current research will be used only for the purposes of the current research. I guarantee confidentiality and non-disclosure of private information that might be at my disposal. The questionnaires will be destroyed after the results of the survey are documented.
Timeline and Resources
I suppose that the research will take approximately two months. This time will be spent on developing the research design, designing, piloting, and administering questionnaire, data collection and analysis (Table 1).
The following resources will be needed to undertake the current research: time, library resources, participation of the new business owners in the survey, analytical and research skills, and internet. In the case if I need additional statistical on-line data, I would probably have to pay for access. The timeline of the project is shown in the Table 1.
References
Benjamin, G.A. and Margulis, J.B., 2013. Angel capital: how to raise early-stage private
equity financing. 1st ed. New York: Wiley Finance.
Carter, C.N. and Quick, J.A., 1998. Grantseeker's toolkit: a comprehensive guide to finding
funding. New York: John Wiley & Sons.
Finkel, R. and Greising, D., 2009. The masters of private equity and venture capital. 1st ed.
New York: McGraw-Hill.
Fullen, S., 2006. How to get the financing for your new small business: innovative solutions
Hart, R.M., 2012. CrowdFund your startup!: raising venture capital using new
crowdfunding techniques. Houston: CordaNobelo.
Johnson, R.S., 2013. Debt markets and analysis. New York: Bloomberg Press.
Marks, K.H., Robbins, L.E., Fernandez, G., Funkhouser, J.P. and Williams, D.L., 2009. The
handbook of financing growth: strategies, capital structure, and M&A transactions.
2nd ed. New York: Wiley Finance.
Strauss, S.D. Get your business funded: creative methods for getting the money you need. 1st
ed. New York: John Wiley & Sons.
Swanson, Z., Srinidhi, B. and Seetharaman A., 2003. The capital structure paradigm:
evolution of debt/equity choices. New York: Praeger.
Pinto, J.E., Henry, E., Robinson, T.R. and Stowe, J.D., 2010. Equity asset valuation
workbook. 2nd ed. New York: John Wiley & Sons.
