CASE # 1 - LAW OF CREDIT AND FINANCE

Adelaide had saved a considerable sum of money over the years. She was very proud of her niece, Elandra, who had incorporated and started her own horseracing stable, which had become quite successful and quickly grown to four horses. Elandra's horses had done very well at the racetrack and she was in the process of planning the next stage in the development of her racing stable. To make her plans a reality, Elandra required financing of $100,000.00. She was experiencing difficulty in finding the money because of the risky nature of horse racing and the fact she had been in operation for only four years.

Adelaide believes Elandra has what it takes to be a success and wants to help her by investing in the racing stable. Adelaide also wants to make sure that the risk to her investment is minimal. Adelaide heard that you took an excellent business course at college and has come to you for advice.

Please advise Adelaide on:

1. The options available for investing in Elandra's business. [LO 11.3]

2. The process involved with each form of investment. [LO 11.3]

3. The risks and benefits associated with each form of investment. [LO 11.3]

LO 11.3Financing Operations

Sal:Hi Crnch. What you are experiencing is not unusual for a startup company (the money crunch, not the avoiding family gatherings part). You need to determine your short-term money (capital) needs, as well as your long-term capital needs. Then you can consider whether to finance your business operations through debt or equity.

Debt or Equity

Debt financinginvolves borrowing the capital for a period of time and repaying the loan plus any interest charged, in accordance with the terms of the loan agreement.Equity financingis accomplished through the sale of shares in your corporation to investors. The investor receives an ownership interest in the company and its potential growth in exchange for the capital paid to buy the shares.

A financial institution, finance company, or an individual may be willing to lend money to a business on an unsecured basis, if it considers the loan to be a low risk. In this arrangement, the debtor promises to repay the loan in accordance with the terms of the lending agreement. If the debtor defaults on the repayment, the lender will sue for breach of the lending agreement and enforce its judgment against the debtor.