Financing Methods for Small Business

FINANCING METHODS FOR SMALL BUSINESS 7

FinancingMethods for Small Business

Question1

Advantagesof Financing with stock Rather than Bonds

SinceGonzales Company is seeking expansion, there are two ways that it canuse in raising the capital that it requires for expansion. The twoways entail selling stocks to the public or selling bonds. Selling ofstocks implies allowing investors to purchase shares in the companythis means that investors will own part of the company. On the otherhand, selling of bonds implies borrowing money from investors andpaying back an interest to the investors (Brigham &amp Ehrhardt,2013). One of the advantages of financing the expansion of thebusiness with stocks instead of bonds is that the company would notowe any money to the investors because the company is not borrowingmoney from the investors. The entity will not be obligated to makeany payments for the resources that the company raises throughselling stock. Another advantage of financing the company operationsthrough selling stocks rather than selling bonds is that anincreasing stock value can help the company to increase its creditrating, which would make it easier for the company to borrowresources in the future. Besides, selling stocks offers the companywith an opportunity to expand without facing bankruptcy this isbecause the company can go bankrupt on borrowed money. In addition,through selling stock, the company can have the benefit of takingadvantage of investors’ expertise, labor, contacts or services.

Disadvantagesof Using Stock

Oneof the disadvantages of selling stocks instead of bonds is that thecompany would dilute its ownership interest. When the companyfinances its expansion plan through selling stocks, it will have togive part of company’s ownership to the investors. The company maylose control of the operations in case it does not keep 50% of thestake. Another disadvantage of using stock is that the company willhave to share its profits with the investors. Also, using stock infinancing the operations of the company may lead to the companyexposing information to investors that it could have preferred tokeep a secret. Furthermore, the company will have the disadvantage ofhaving to explain every decision that it makes to the investors.

Question2

Thestock of Gonzales food stores is privately held at the present. Thereason for arguing that the stock of the company is privately held,at the moment, is because the ownership of the company has not beenoffered to the public. The company is owned by family members onlywith no outside investor. This implies that the company is privatelyowned. The ownership of the company would change in case the companysells stock. Selling stocks of the company implies selling part ofthe ownership of the company to investors. When some portion of thecompany’s ownership is sold to the public in form of stocks, thecompany’s current ownership would change. Through selling thecompany’s stock, the company would change from being privately heldto being publicly held.

Question3

Classifiedstock entails a company’s equity that is categorized into more thanone class or category. A company may choose to designate its sharesinto class B and class A stocks, where class A stocks could be soldto the public while class B stock could be seen as founders’ stock.In the case of classified stock, every class of stock has certainfeatures that are well set and incorporated in a company’s charter.For example, a certain class of stock may have dividend rights aswell as voting privileges. A company may opt to have classifiedstocks in case it desires to limit the voting privileges within itsorganization. Since a company may desire to retain control over itsoperations, it may classify its stocks so as to ensure that it sellsstocks that do not affect the operations or control of the company.For example, a company may classify its stocks in such a manner thatone class of shares have the feature of possessing voting rights,when the company is making major decisions while the other class ofstocks may lack this feature. In this case, the company wouldconsider selling the class of stocks that does not have the featureof possessing voting rights. This would be crucial in ensuring thatthe entity has control over its operations since the stocks sold tothe public would not make the public to have any voting rights, whenthe company is making key decisions that would affect its operations.

Therewould be an advantage to Gonzales of designating the stock it hascurrently as founders’ shares. Through designating this stock asfounders’ share, the company would have the advantage ofcontrolling most of its operations. This is because these shareswould possess a lot of privileges that would aid in controlling theplans and decisions that the company would make. In order for thefamily to retain control of the business, it should considerclassifying its stocks into two, where one class would comprise offounders’ shares while the other class of stock would comprise ofnon-founders’ shares. The two classes of shares should havedifferent features such as voting rights and other privileges. Thecompany has to ensure that founders’ shares have differentprivileges that would ensure control of the business. Therefore, theGonzales family should consider selling non-founders’ class ofshares in order to ensure that it retains control of the businessoperations.

Question4

Goingpublic is the process, whereby a company sells shares, which wereinitially privately held to fresh investors for the first time(Jenkinson &amp Ljungqvist, 1999). This is also known as the initialpublic offer (IPO). The moment a company goes public, it is the timewhen the public have the ability of purchasing shares of the company.Through going public, a company becomes publicly owned as well aspublicly traded.

Bythe Gonzales stores going public, the Gonzales family would have thebenefit of raising the much needed capital that it requires for thebusiness expansion. This would imply that the family would haveresources that would help in the expansion of the business with noproblems. The capital raised through selling stocks may be used tofund capital expenditures, hire more employees, and fund the companyprocesses among other things. Another merit that the Gonzales familywould have through Gonzales stores going public entails having anincreased public awareness of their company. Initial public offerwould generate publicity by making the products sold by the companyknown group of prospective customers (Jenkinson &amp Ljungqvist,1999).

Onthe other hand, through the Gonzales stores going public, theGonzales family would experience some disadvantages. One of thedisadvantages to the family would entail the change of ownership(Brigham &amp Ehrhardt, 2013). By issuing shares to the public, thecompany would become publicly owned. This implies that the Gonzalesfamily would lose the initial ownership of the company and own thecompany together with the public. Besides, another disadvantage ofgoing public to the Gonzales family entails the need to discloseprivate information of the company to the public. After the Gonzalesstores become publicly traded, it would be required to disclose anyinformation that may be needed by investors.

Question5

Publicly-tradedcompanies are usually traded on a certain stock exchange. Stocks ofsuch companies are said to be listed stock since they are offered fortrade on a given stock exchange. For instance, stocks of companiesthat trade on the New York Stock Exchange (NYSE) are consideredlisted stock for the NYSE. Listed stock has to conform to the listingrequirements of a given stock exchange (Allen, 2015). In case acompany does not adhere to the listing requirements provided by agiven stock exchange, the company’s stock may become delisted fromthe stock exchange it is trading on.

Itis probably that the Gonzales’ stock would become listed shortlyfollowing the company’s process of going public. However, in orderfor the company’s stock to become listed in a certain stockexchange, the company will be required to follow and fulfill listingrequirements in case the company does not follow the listingrequirements, it will be difficult to list the company’s stock on agiven stock exchange. On the other hand, the stocks of Gonzales canbe traded over the counter market after the company goes public.

References

Allen,K. R. (2015). Startinga business all-in-one for dummies. Hoboken,NJ : John Wiley &amp Sons.

Brigham,E. F., &amp Ehrhardt, M. C. (2013). Financialmanagement: Theory and practice.Mason, Ohio: South-Western.

Jenkinson,T., &amp Ljungqvist, A. (1999). Goingpublic: The theory and evidence on how firms raise equity finance.Oxford: Oxford University Press.