Financial Contracting for New Venture:
Investments in a new venture usually involve financial contracts between the entrepreneur and external investors. These external investors include venture capitalists, angel financiers, banks, private financing companies, and credits unions among others. Notably, financial contracts can have positive and negative effects on the new venture. For instance, an angel financier can add a clause on the financial contract that will not permit the entrepreneur to borrow more funds without permission from the lender. While this is likely to occur when the lending institution has a mortgage or lean on the venture's property, the clause is usually added to lessen foreclosure risk. As an individual seeking to venture in a clothing business for the Mixed Martial Arts customers to provide shirts, hoodies/fleeces, and hats, it is important to choose the most appropriate type of financial contracting with the external investor. This process of selecting the most suitable type of contracts will include evaluating financing alternatives for the new business to avoid being controlled by lending institutions. This paper basically seeks to determine the type of financial contracting for the new venture that might be agreed upon between the entrepreneur and prospective investor.
Need for Financial Contracting for the New Venture:
Generally, many businesses are developed without generating significant amounts of outside capital from outside investors (Maeder, n.d.). These businesses are started with minimal infusions of cash from the entrepreneurs and sometimes amplified by support from wealthy individuals or relatives. Through these sources of capital, the entrepreneurs avoid attempts and intensity of raising capital from lending institutions or outside institutional investors. Most of these small businesses end up small and their entrepreneurs are happy to maintain control of the family and seek for modest growth.
The main goal of the new venture of a clothing business for Mixed Martial Arts is to achieve tremendous growth and productivity and eventually grow into a big venture. As a result, this venture requires generating more capital to promote its growth and profitability across all operations. Generating small capital for this venture will not be appropriate because it will put the enterprise in a weak position and will demonstrate lack of ability to project the future. Following the recognition of the necessity for the enterprise to develop and grow rapidly, the venture will require large amounts of capital from outside investors, especially institutional investors through financial contracting.
Financial Contracting with Outside Investors:
As previously mentioned, the new venture of a clothing business for Mixed Martial Arts customers requires financial contracting with outside investors in order to raise large amounts of capital that are needed to start-up the business. After identifying the need to develop and grow rapidly and need to generate large amounts of external capital, there are a wide range of options for the entrepreneur with each option being suitable to a different stage of growth. The choice of the type of financial contracting to be considered for the new venture requires evaluation of financial alternatives to avoid being controlled by the lending institutions. It will also involve examining what the possibilities are and agree about the certainty of likelihood of each outcome between the entrepreneur and prospective investor.
Similar to starting a fashion business, starting up the new venture requires consideration of some major steps before financial contracting with outside investors. These steps include conducting extensive research, determining the location of the enterprise, knowledge of customers and neighborhood, determining the budget, and preparation of appropriate documents for the business (Anderson, 2013). Conducting each of these steps is crucial because of the role it plays in determining investor confidence in the business. Outside investors, particularly institutional investors make their investment decisions after evaluating the extent with which the entrepreneur has carried out each of these steps. This is primarily because these steps play a significant role in determining the success and profitability of the business and returns on investments for the outside investors.
There are four major types of financial contracts that could be considered for the new venture of a clothing business for Mixed Martial Arts customers. These types of financial contracts are classified into two major categories i.e. debt-type contracts and equity-type contracts. The debt-type contracts include standard debt and debt with reorganization while equity-type contracts are voting equity and preferred equity contracts (de Bettignies, 2008, p.157). Standard debt contract is appropriate when investor control and entrepreneur control are the only two viable control right allocations. This contract is implemented as long as the investor's cost of capital...
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