College of Administrative and Financial Sciences
Assignment 3
Deadline: 28/11/2020 @ 23:59
| Course Name: Entrepreneurship and Small Business | Student’s Name: Lobna Alshabanah |
| Course Code: – MGT 402 | Student’s ID Number: 160114562 |
| Semester: I | CRN: |
| Academic Year: 1440/1441 H |
For Instructor’s Use only
| Instructor’s Name: Dr. Vinay Nagu | |
| Students’ Grade: Marks Obtained/Out of | Level of Marks: High/Middle/Low |
Instructions – PLEASE READ THEM CAREFULLY
- The Assignment must be submitted on Blackboard (WORD format only) via allocated folder.
- Assignments submitted through email will not be accepted.
- Students are advised to make their work clear and well presented, marks may be reduced for poor presentation. This includes filling your information on the cover page.
- Students must mention question number clearly in their answer.
- Late submission will NOT be accepted.
- Avoid plagiarism, the work should be in your own words, copying from students or other resources without proper referencing will result in ZERO marks. No exceptions.
- All answered must be typed using Times New Roman (size 12, double-spaced) font. No pictures containing text will be accepted and will be considered plagiarism).
- Submissions without this cover page will NOT be accepted.
Department of Business Administration
Entrepreneurship and Small Business – MGT 402
Marks: 5
Course Learning Outcomes:
- Demonstrate a solid understanding of the potential of entrepreneur in today’s competitive business world. (Lo 1.2).
- Design a solid projected financial Plan and conduct a breakeven analysis for a small company. (Lo 2.5).
- Demonstrate a thorough understanding regarding the importance of cash management for the success of a small business. (Lo 2.8).
Assignment – 3
Students are supposed to read the Case 2- Able Planet from the textbook, page number:812
“How can a small company find capital to finance an innovative new product?”
Textbook: (Scarborough, N.M. & Cornwall, J. (2012). Effective small business management: An Entrepreneurial approach (10th ed.). Upper Saddle River, NJ: Prentice Hall.
Based on your understanding of the case and concepts, answer the following question in 200-350 words each.
Assignment Questions:
1. Experts say that entrepreneurs who need between $100,000 and $3 million often face the greatest obstacles when raising capital for their businesses. Why? (1.5 marks)
2. How should Kevin Semcken raise the $1.5 million in capital that Able Planet needs? Be sure to consider sources of both debt and equity financing. (1.5 marks)
3. Homework help – Write a short memo to Kevin Semcken explaining what he should do before he approaches potential lenders and investors to maximize his chances of getting the capital that Able Planet needs. (2 marks)
Answer:
Question 1
Businesses interested in the capital of between $100,000 and $1,000,000 are small and medium enterprises. One of the categories of firms that may fall into this category are start-ups. Start-ups are high-risk ventures with no guaranteed rate of return. Investors and lenders are aware of the risk of loaning funds to such enterprises and are likely to turn the requests down because the returns are barely commensurate with the risk involved.
The lack of collateral for businesses in this category is also a barrier to securing funds. Most lenders need collateral as security against borrowed funds. The collateral serves as a guarantee that in case of any eventuality, the lender can obtain their funds. Unfortunately, businesses that may be interested in $100,000 to $1,000,000 loans barely have any collateral to secure their loans. Any lender that consents to give a loan without collateral risks losing all the funds advanced to the borrower without any possibility of recovering.
A business can also acquire a loan without collateral using its historical financial performance and product portfolio. For example, if an entrepreneur has achieved a year-on-year outstanding financial performance over a considerable duration, for example, five years, such as a positive cash flow, a substantial net income, and low cost of sales, they could use this record to secure a loan. The financial statements are a testament that the entrepreneur has a growing market for their products. Unfortunately, as highlighted herein, entrepreneurs who may be interested in $100,000 to $3,000,000 capital barely have any financial performance worth considering. Subsequently, they cannot leverage their historical financial performance to secure a low, making it all the more difficult.
Question 2
From the case study, Able Planet has carved a niche for its products, which has been growing by the day, thanks to its Linx headphones. The company has attracted interest from a decent following, which has enabled it to gross $2 million in revenue. Able Planet should leverage its current and potential customers for funding through crowdfunding. According to Mollick (2014), crowdfunding allows an entrepreneur to raise capital from the public in return for future products. Able Planets has already created a reputation for its products; therefore, convincing its followers to contribute to more innovative and superior products would not be a challenge.
Alternatively, Semcken should consider finding an angel investor. According to Tiftik and Zincirkiran (2014), an angel investor provides more than financial support to a business. They also offer social, technological, and physical support to the entrepreneur to facilitate accomplishing the goal (Tiftik and Zincirkiran, 2014). The investor also participates in managerial duties, offers support in sales and marketing, recruitment, and other critical responsibilities necessary for its operation. Semcken can raise the required $1.5 million through an angel investor.
Question 3
Every lender’s principal concern is the possibility of acquiring back the loan advanced and any applicable interest. Subsequently, every potential lender must be convinced beyond doubt that you can repay the $1.5 million according to the terms of your agreement. One of the steps is to prepare an extensive business plan. The plan should entail an analysis of both current and conceptualized products and how far these are in the development lifecycle.
The second step is to prepare accurate, reliable financial statements for the company. The statements should accurately represent Able Planet’s financial performance. If possible, they should be audited to ascertain their accuracy. Any serious lender wants to know their resources are not wasted on a company on life support. Alongside the financial statements, a projection of the company’s net income, profitability, and liquidity would also go a long way in convincing potential lenders about the viability of the company.
Lenders are also interested in knowing how the borrower intends to use the capital and how that plan will generate revenue to repay the debt. A comprehensive loan analysis highlighting the intended use of the loan amount accounting for every dollar will also go a long way in convincing potential lenders that the Able Planet is a worthy investment.
References
(Scarborough, N.M. & Cornwall, J. (2012). Effective small business management: An Entrepreneurial approach (10th ed.). Upper Saddle River, NJ: Prentice Hall.
Mollick, E. (2014). The dynamics of crowdfunding: An exploratory study. Journal of Business Venturing, 29(1), 1-16. doi: 10.1016/j.jbusvent.2013.06.005
Tiftik, H., & Zincirkıran, M. (2014). “Angel Investors” in Entrepreneurship: An Assessment on Turkey Model. Journal of Business Research – Turk, 6(1), 42-42. doi: 10.20491/isader.2014115962
