Running head: Case 2 Able Planet Case 2 Able Planet Kelly Raines Devry University SBE 560 ? Contents Abstract3 The difficulties entrepreneurs face when raising between over $100,000 for their businesses4 Ways Kevin Semcken can raise $1. 5 million in capital5 Memo to Kevin Semcken7 References9 ? Abstract This paper will analyze Case Study 2 Able Planet. In this case study, Kevin Semcken, Able Planet’s CEO and chairman is seeking capital to finance existing operations for its current products, build a prototype for a new product and market both products to new and current customers (Scarborough, 2012).
Furthermore, Able Planet is unable to secure financing from a bank due to a predicament in the economic markets which has all but closed shut the lending opportunities at most commercial banks. Information that will be evaluated includes the following: •Why entrepreneurs face difficulties when trying to raise between $100,000 and $3 million for their businesses •Ways Kevin Semcken can raise $1. 5 million in capital by use of both debt and equity financing •What should be done before approaching potential lenders and investors in order to maximize the chance of getting needed capital ?
The difficulties entrepreneurs face when raising between over $100,000 for their businesses Capital is the lifeline of any business; it supplies the funds to expand, grow and make a promising business idea into a money-making enterprise. However, many entrepreneurs miscalculate how difficult it is to obtain financing for a business venture and get annoyed by this step of the business startup process. Nevertheless, investors and banks have plenty of reasons to be wary of financing especially it involves several thousands of dollars.
Some of the reasons that entrepreneurs have issues when trying to raise large sums of capital include: •Most small business fail: According to Channon (2012), “More than 50 percent of businesses fail within the first five years of operation. ” This makes its difficult to raise capital due to the uncertainty in getting a return on an investment. •Unproven Business Model (Channon, 2012): If the business idea is new, then there is no historical data such as sales to show that the business will last. This means that there is no guarantee that the business will repay the loan or increase the investor’s equity. Lack of Coherent Business Plan (Channon, 2012): This will prevent lenders and investors from financing a business. The business plan will give a financial forecast along with market research and a list of competitors. This will allow investors to see an actual financial result that are expected and help them to decide of this is realistic. ? Ways Kevin Semcken can raise $1. 5 million in capital Whether Kevin Semcken is preparing to launch a new product or is trying to grow Able Planet, one thing is for certain; he will need money.
Debt and equity financing are two different financial strategies that can be used to raise capital: Taking on debt means borrowing money for the business, while gaining equity entails injecting his own or other stakeholders’ cash into the business. Mr. Semcken can use debt financing as a means to raise the needed capital. One way to do this is borrowing from a financial institution. This involves loans that have to be paid over time and with interest. Able Planet can borrow money over the short term (less than one year) or long term (more than one year).
The chief sources of debt financing are banks and government agencies, such as the Small Business Administration (Rath, 2012). Debt financing presents businesses a tax advantage, because the interest paid on loans is usually deductible. Borrowing also reduces the company’s future requirement for loan repayments, because the lender does not obtain an ownership share in the business. However, debt financing also has its disadvantages. New businesses at times find it hard to make regular loan payments when they have uneven cash flow.
Thus, debt financing can cause businesses to be susceptible to economic downturns or hikes in interest rates. Carrying too much debt is a problem because it raises the supposed risk associated with businesses, making them unappealing to investors and thereby lowering their capacity to rise future additional funding (Rath, 2012). The other option Mr. Semcken can use is equity financing. Equity financing refers to money attained from investors in exchange for an ownership share in the business.
Such funds may come from friends and family members of the business owner, wealthy angel investors, or venture capital firms (Rath, 2012). The main advantage of equity financing is that the business is not required to repay the money. Instead, the investors expect to recover their investment out of future profits. The participation of high-profile investors may also help raise the credibility of a new business. The main disadvantage to this type of financing is that the investors become partial owners of the business, and therefore have a say in business decisions.
As ownership interests become blurry, managers face a probable loss of independence or control (Rath, 2012). As well, an undue dependence on equity financing may signify that a business is not using its capital in the most constructive way. ? Memo to Kevin Semcken Memorandum To:Kevin Semcken, CEO and Chairman of Able Planet From:Kelly Raines Date:3/24/2013 Re:Steps to take before Approaching Potential Lenders and Investors Money is the livelihood of any business, and at some point, every company is apt to need an outside source to help it grow.
Regardless of the amount that you are seeking, you will need to take a few steps before trying to make your case. Here are some steps to you must do before approaching investors or lenders for any amount of money: •Gather together the documents that will help you secure funding from a backer and that indicate you are a good risk (Clifford, 2012). You will need: oA well written business plan, which will shows the backer not only why you want the capital but what you plan to do ith the money; oCash flow projections, which will show lenders and investors if you are able to repay the loan or offer a return on the investment. This will give backers concrete financial data that they can use to assess this risk; oA statement of your personal financial status, which lists your personal assets and debts to give the backer a fuller financial picture; oPast business tax returns: As this business is established and you have past business tax returns, it is a good idea to take them with you to the meeting.
They will give the lender/investor a better idea of how your business is doing financially; and oA credit rating report: Your credit rating report shows loan repayment history and will help backers determine if you are a good risk. Additionally you should: •Line up your team (Clifford, 2012): This shows that you and the management team are able to execute the ambitious business plan you have presented and pay back your loan or generate a return for investors.
Make sure you and your key people can talk about what may be ahead for the business, what the later phases of growth might be, what can go wrong, and how you might handle those things. •Practice your presentation (Clifford, 2012): This will include highlighting key areas of your business plan to potential funding sources. Try to find areas of your plan that show what you consider to be the most advantageous to them, and put these attributes into a 15 minute slide show presentation appropriate mainly to the professionals to whom you are presenting.
Also study the business plans completely because you never know what questions will be asked, and you want to have answers pertinent to your business model. •Finally, research those to whom you will be presenting, produce samples/prototypes of your main product(s) for them to assess, purchase a nice business suit, and conduct the presentation of a lifetime. By following the above steps securing funding for Able Planet should be easy if you are properly prepared for the meeting. ? References Channon, T. (2012). Why is it So Hard to Raise Capital When Starting a New Business?. Ehow.
Retrieved August 10, 2012, from http://www. ehow. com/about_7448696_hard-capital-starting-new-business_. html Clifford, C. (2012, June 15). 9 Things Startups Must Know Before Approaching Lenders. Entrepreneur. Retrieved August 10, 2012, from http://www. entrepreneur. com/blog/223818 Rath, T. (2012). Debt and Equity Financing: Two Options for Financing Your Small Business. About. com. Retrieved August 9, 2012, from http://sbinformation. about. com/od/creditloans/a/debtequity. htm Scarborough, N. (2012). Effective Small Business Management. (10th ed. ). (p. 812). Boston, MA: Prentice Hall.