Raising capital for a new venture is always a daunting task due to the financial demands it puts on the business. As a result, choosing the right means of raising capital is critical to the success of the new venture. For Databiz, who are trying to raise $20 million, there are several factors that they need to consider. First, they need to determine the repayment terms of all their alternatives. The repayment terms must be in line with their business proposal, such that they do not overstretch themselves by taking short term loans yet the business is not expected to pick any time soon. Additionally, long term alternatives mean that they will have more time to stabilize the new business, but they will also have to part with more money in form of interest. Databiz also needs to determine the financing requirements; loans and investors (for bonds and stocks) have different requirements, and the business must determine which alternative is the best for the business.
The first alternative is bonds. These have the advantage of being cheaper to issue compared to shares. However, since this is a source of capital for the company, then the disadvantage is that the investors have to earn their money back, with interest. On the other hand, shares are not considered as expenses for the organization, and they also have more tax benefits compared to bonds or loans. Nevertheless, shares are riskier as they have a higher interest payment. Loans also have the advantage of being easier to access for established businesses, but like shares, they often come with high interest rates.
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If Databiz has the capacity, then its best alternative is to isse bonds. These will not only enable the company to gather the capital needed for conducting business, it will also give them lower interest rates and more time to repay compared to loans and shares, which may require them to start repaying as soon as the first financial year.
