Start-up costs of a small business Essay Sample
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Start-up costs of a small business Essay Sample
According to Scarborough (2013) very few entrepreneurs have adequate personal savings needed to finance the complete start-up costs of a small business: many of them must rely on some form of debt capital to launch their companies. Cornett et al. (2015) also stated that debt is utilized by numerous corporations and people as a technique for making vast buys that they couldn\’t bear the cost of under typical conditions. A debt arrangement plan gives the acquiring party authorization to get cash under the condition that it is to be paid back at a later date, more often than not with interest.
In the assessment of the status of financial leverage of construction companies of the owners or managers, they specifically agreed that the statement the company is able to repay its debts and interest on time, which achieved the highest weighted mean of 3. 37 which means that their companies are high leveraged, is being exercised accordingly. This reflects the companies are very diligent in paying their debts and interests on or before maturity.
Also, it showed that they don’t want to pay an additional expense incurred for not paying on time. Anastacio et al. (2010) defined financial leverage as the use of borrowed funds in carrying out the firm’s operation. This means that the firm is willing to borrow money and pay fixed interest charges from the loan. According to Irby (2016) interest rates are a major factor with regards to debt, particularly when you\’re repaying your debt. Your interest rate makes the difference in several months and several thousand of debt pay off.
It was found in the study of Choi et al. (2014) that the uncertainty of production systems and the long project timelines resulting from the characteristics of the construction industry are known to cause many difficulties in the management of these types of companies. The structural problems mentioned above are causes of discriminative treatment (loans at high interest rates, requests for excessive collateral) against construction companies by credit/financial institutions compared to other industries.
Accordingly, construction companies are reducing their financial risks through management strategies such as reinforcing their capabilities to receive orders and developing overseas construction markets. However, it is thought that construction companies are likely to repeatedly become insolvent in crisis situations unless their financial strategies are fundamentally changed.
They also agreed with the statement that Grants from the government to start the business is low which is reflected with a weighted mean of 2. 90 which means that their companies are high leveraged. This reveals that grants from government institutions are hard to achieve and it is hard for construction companies to avail and qualify for this. Grants are award of financial assistance in the form of money by the government to a qualified grantee with no desire that the funds will be paid back. Also, a grant is how the government and other organizations fund your ideas or business to stimulate the economy, benefit the public or generate publicity.
It was found in the study of Furto (2011) that a grant for small and medium retail business, will not be easy to find, opportunities from it are hard to come by and even harder to qualify for. He also added that applying for grants takes time and money. In addition, they also agreed to statements, money loaned from commercial banks is relatively high and The company uses installment purchases on some of the buildings or equipment which both resulted to weighted mean of 2. 80 which means that their companies are highly leveraged.
This reveals that companies borrowed money are loans from commercial banks. Also, they preferred buying some of their property and equipment by paying for it in periodic instalments. Stated in the article entitled “Financing Trends in the Construction Industry” that lending to the construction industry continues to present underwriting challenges for banks, it is an industry in which banks do lend to frequently. It is critical that a construction company position itself in the best light and provide accurate reliable financial information to the bank during the loan request and loan monitoring periods.
Banks look very favorably to companies that borrow to support growth in operations and not to finance historical losses. For construction companies, the best opportunity to obtain a loan while mitigating the risks to the bank is to providing the most accurate financial and non-financial information as part of the loan request. It was also found in the study of Torteska (2012) that companies rely on formal external sources, such as bank loans, leasing, and equity. They mostly rely on bank loans making it number one of external financial source.
In addition, Borad (2009) stated that installment purchase is characterized as another strategy for financing the capital goods or assets whereby the assets are acquired by the purchaser however the installment is made in smaller portions. This is the reason why construction companies preferred installment buying than other types of purchasing. Moreover, they agreed with the statement that the Company has obtained small portion of its investment through borrowed money that resulted to a weighted mean of 2. 54 which means that their companies are highly leveraged.
This reveals that companies purchased goods that are not consumed today but used in the future through borrowed money. It was found in the study of Furto (2011) that funding was an essential part of the decision for a large investment. The major considerations in funding were cost, control, flexibility and risk. Debt is often seen as less expensive than equity, partly because the cost of debt is tax- deductible. According to Anastacio et al. (2010), by successfully using debt financing, the firm increases the owners’ return on their investment.
Although the successful use of debt financing increases the return on equity, it also increases financial risk. On the other hand, they disagreed to the statement that the portion of the company’s assets that are financed by debt is high which resulted to a weighted mean of 2. 36 which means that their companies have low leverage. This reveals that to be able to finance and maintain company’s assets heavy machinery, vehicles, inventory and so forth the company used a not so high portion of debt.
It is found on the study of Rafique (2011) that a debt ratio which is the ratio of total debt to total assets is a financial ratio that measures the extent of a company’s leverage. However, he also stated that debt to equity ratio is regularly used to decide the capacity of company to repay its obligations. This proportion demonstrates the company\’s money related strength and reliance on lenders. The proportion is an alternative option to debt ratio.