Why Entrepreneurs Select One Source Of Finance Over The Other? (Essay Sample)

Entrepreneurship Name: Institution: Date: Introduction Choosing a source of finance, appropriate to a business, is time-consuming and a difficult task for entrepreneurs. This is caused by the amount of available funding options to the entrepreneurs. Financing can be in form of investment or debt hence the significant varying terms of different financial sources. Therefore, an entrepreneur needs to critically analyze the implications and criteria of each financial source by weighing the benefits and costs of each source before deciding on the one to select. In this research, we shall consider the practical issues that the entrepreneurs face when selecting an appropriate source of funds for their businesses. We will also associate our research with the Australian real estate business given that securing the capital required to grow it is a critical concern to the new entrepreneurs looking to venture in the business. In summary, this analysis talks about the reasons or factors that influence the entrepreneurs to choose one source of funding over the other. One factor that influences the entrepreneur to choose one financing option over the other is consideration of the risks involved in the various options available to him. He considers what will happen in the case where the financial commitments relating to a particular source are not met. When the business is a startup, the entrepreneur bears in mind that certain finance suppliers can perceive him as having a higher failure risk than any existing business which will results to difficulties in obtaining funding (Peirson et.al, 2014). That being said, the entrepreneur selects the financial option that minimizes his overall capital structure, thereby maximizing the present value of the future cash inflows. The second factor is the cost of finance and the effects it has on income plays a fundamental role in the entrepreneur’s financing decision. The entrepreneur finds considering the implications of selecting one financing source over another essential as he aims to minimize the finance costs and maximize his own wealth. Thereby, if he considers that a certain financing source might increase their risk of bankruptcy, then he goes for the one that will offer additional returns, compensating him for this risk. And as each source of funding offers certain pitfalls and benefits, the entrepreneur adds up all costs that are associated with each source before he makes a decision on the one to choose. Control is the other factor that plays an important role in deciding the source of finance the entrepreneur should adopt. When an entrepreneur decides to issue more additional shares intending to raise funds, he dilutes the control he has among the existing shareholders giving each investor a piece of his business ownership thereby being accountable to the shareholders. Therefore, entrepreneurs who want to keep control of their businesses, who prefers to be the ones making the major decision about their businesses prefers other sources of financing like the loan capital. Once the loan is paid off, their relationship with the lenders automatically ceases, whereas investors will continue to have a say in his business until those investors are bought out (Schwienbacher,2015). The entrepreneur understands that the way he chooses to finance his business will impact his independence as management, thereby deciding carefully on the finance source to go for. The source of finances for investing in the real estate business poses a great challenge to the entrepreneur who wishes to venture in the business. This is due to economic instability and the stringent measures that are imposed by most financial sources in Australia. Most entrepreneurs don’t go for loan capital due to the structure of interest rates which usually have an unfavorable impact on...