Finance and Economics
Financing a business can be a challenging and at the same time, a time consuming job. However, as long as the business or the product whose production, marketing, and sales needs to be financed possess the qualities that investors look for, the process can be made exponentially easier and faster than it often has to be . This leads us to the question, what are those qualities? The proposed scheme to finance this business and or new product introduction venture is to get financial support from the capital market. This main option is divided into three sub-options: 1. to attract an angel or an independent investor; 2. to issue a business startup loan; 3. and to issue a corporate bond through an underwriter or an investment bank.
Attracting Angel and or Independent Investors
For our Intelligent Fabric Suit, the investor market we would most likely get in touch with would be angel or independent investors. At some point, it may also be possible to get financing support from retail investors. This product is going to be a first in the motorcycling industry. In fact, the Intelligent Fabric Suit can be considered as a crossover between two markets —the motorcycling and the sports apparel markets. Independent investors are, as the name implies, freelance investors who have the necessary financial resources to fund a considerable portion of the total financial requirement to run a business venture .
The members of the management team, or the financial department, for example, may schedule meetings with prominent investors, from a short list of a few people, and talk about the possibility of that investor putting a portion of his investment resources to finance the Intelligent Fabric Suit business venture. The secret here is to be direct, succinct, and to have and be able to present feasible entry, expansion, and exit strategies. The ones who will present the business plan should also be able to highlight the good points of the business without failing to mention the risks and assumptions of the proposed business venture as these are the main things that independent investors look for in an investment venture. Part of the finance team’s responsibility is to research individuals who they think may be capable and or willing to be a business partner.
Issuing Corporate Bonds
Corporate bonds are bonds issued by corporations either for startup and or expansion purposes. In this case, we are going to issue bonds to finance the business venture that aims to deliver our Intelligent Fabric Suit into its target market. A bond is a debt instrument that allows businesses to loan money from investors instead of from the bank . As with a bank loan, under the agreements of the corporate bond, the corporation that issued it is required to pay for a defined and fixed interest rate over a period of time, depending on the bond’s tenor, and pay the investors’ principal upon the bond’s maturity.
It is a common investment tool that corporations use to finance their projects and new business ventures. Corporate bonds are graded by credit rating institutions. Newly formed corporations who wish to issue corporate bonds for the purpose of financing their business may be subjected to higher bond interest rates compared to more established corporations. This is because a higher level of risk—risk that the issues, the corporation, would not be able to pay the principal and the promised coupon or interest rate, is often associated with newly formed corporations .
In this case, a coupon rate of 10% per annum, with 5% interest rate paid to corporate bond holders in a semi-annual basis—that is twice a year, with a tenor of 20 years may be attractive enough for fixed-income security investors to take. Should the corporation be able to successfully pay the interest rates and the investors’ principal capital in time, or even way ahead of schedule, then it can increase its corporate bond rating up to investment grade ones. By that time, the Intelligent Fabric Suit Company may be able to issue more corporate bonds with lower coupon rates, which should work in its favor because that would equate to a cheaper capital.
Bank Loans
Loaning from the bank is one of the most conventional financing schemes that businesses use for expansion and startup purposes. Bank loans are actually similar in a lot of ways to corporate bonds. In general, however, bank loans are more restrictive and risky because there is always collateral involved—should the borrower fail to honor the payment agreements written under the loan contract .
In this case, should the management team choose bank loans as their financing option over the former two choices, and then it can simply match the conditions under its corporate bond agreement. That is, the amount of capital to be loaned depending on the initial financial demand of the business venture, to be paid with a 10% interest rate over the course of 20 years with the option to make extra payments every month of pay for the remaining loaned principal at one time within the loan agreement’s tenor. The key with bank loans is to pay on time and be able to bargain a lower interest rate with the issuer of the loan.
The Kick Starter Campaign
Under the kick-starter campaign, the management team entertains donors who are people just willing and wanting to help without necessarily expecting anything in return. The management team will use the following reward structure for participant donors in the kick-starter campaign.
Finance Scheme Computation
Assuming that the management team decides on borrowing money from the bank in the amount of $100,000 (this should change as the management team makes modifications in the original business plan), the following table shall explain how the company will be able to pay the loan with a tenor of 20 years.
Now, considering this financing table, the management team should be able to make at least $966 a month out of product sales and donations to pay their loan over the next 20 years and make an offset. Most banks these days however offer the option for debtors to make extra payments every month aside from their monthly payments. Such extra payments will be automatically deducted from the principal amount, the ultimate result of which would be an earlier loan end date and less total interest payments made by the end of such date.
Yearly Expenses
The table above outlines the yearly expected expenses with the corresponding budget allocations. The remaining budget will serve as a budget surplus and will be used in the upcoming fiscal year.
Target Projected Cash flow
The table above shows the target projected profit for the local sales of the Intelligent Fabric Suit. Assuming that the projected cash flow per month is met for the entire year, the management team shall be able to pay all of the expected yearly expenses amounting to $90,000 with a $150,000 surplus that the business can use for expansion purposes or making upgrades for research and development.
Risks and Assumptions
The main assumption that the Intelligent Fabric Suit management team should make is that their product, the Intelligent Fabric Suit, will get the attention of the market and attract a lot of buyers. In fact, the company should not just assume this. They should work for it. The management team should make sure that their product offering would be attractive enough for buyers. This, of course, would depend on their strategies, such as marketing and pricing strategies, among others. The bottom line often goes like this: if the product is good and worth buying, the market will most likely respond positively to the product introduction.
There can be many risks associated with this proposed business venture. Firstly, what if the target market did not respond positively to the product introduction? This can definitely happen because it often takes time before a market responds to and buys a certain product. Also, considering that the Intelligent Fabric Suit is a first in its class, it can certainly take longer before the company that started the venture to get the response that they are expecting from the market. In the meantime, they should be able to make sure that high-impact marketing strategies would be put in place immediately and that they would be able to continue their operations despite having negative cash flows for the first few months or even year of operations.
Ethical Considerations
The ethical considerations for the Intelligent Fabric Suit business venture will focus on legitimacy, governance, equity, environment, employment, and public-private sector relationships. Under legitimacy, the objective of the corporation is to earn, retain, and improve social legitimacy by clearly defining its mission and vision in terms of the social purpose that the company and products are designed to serve rather than focusing entirely on the maximization of profit.
Under governance, the management team shall strive to make the business venture a community, though of, governed, and managed by all and not just a selected few from the stakeholders, and not just owned and controlled by the investor. Under equity, the management team shall strive to make the distribution of economic wealth and the treatment of all stakeholders’ interests fair and equal, regardless of the contribution. Under environment, the management team considers the impact of its every decision to the environment, focusing on the integration of the principles of restorative and sustainable economics in its mainstream business strategies.
Under employment, the corporation shall make efforts to make the life of its employees worthwhile and enjoyable while at the same time maximizing efficiency, productivity, and loyalty to the organization. And lastly, under public-private sector relationships, the Intelligent Fabric Suit business management team shall ensure the success of power shift by working closely with government-affiliated organizations to integrate the roles and responsibilities of the public sector and the private sector—of which the Intelligent Fabric Suit is a part of. Considering that the Intelligent Fabric Suit is still in its startup phase, there can still be a lot of things that its management team can do to address all of these ethical considerations.
References
Chisholm, A. (2009). An Introduction to International Capital Markets: Products, Strategies, Participants. Wiley and Sons, Chapter 1.
Eugene, A., Volcker, L., & Volcker, P. (2012). Banks Need Long Term Rainy Day Funds. The Washington Post.
Spaulding, W. (2011). The Primary Bond Market. This Matter.
Sullivan, A., & Sheffrin, S. (2003). Economics: Principles in Action. Upper Saddle River, New Jersey: Pearson Prentice Hall.
Vuong, Q., & Tran, T. (2010). Vietnam's Corporate Bond Market, 1990-2010 Some Reflections. The Journal of Economic Policy and Research: Institute of Public Enterprises, 1-47.
