Wednesday, May 6, 2020
Small Business Financing
Question: Discuss about the Small Business Financing. Answer: Introduction: When a small business is set up it is likely to have a bank loan as it is easier to approach the bank and get finance instead of issuing bonds. Banks are the lender of the last resort and are present to help the small business that drives the business forward (Brigham Daves, 2012). On the other hand, issuance of bonds needs regular interest to the lender and for a startup, it might be a risky concern. If too much of bonds are issued and the business fails to cement its place in the market, it might lead to bankruptcy and hence is riskier. It is the reason small business goes for a bank loan. When you apply for a loan, the loan officer gives you the option of posting collateral in return for a lower interest rate. What is the rationale of the loan officer? The lower interest rate is provided because the collateral is kept with the bank. This provides a sense of security to the bank. In the case of any default on the loan, the bank will use the collateral to cover the loan amount. Collateral is a mechanism to keep the risk at bay. This can be cited as a secured loan where the parties to procure loan has the security (Choi Meek, 2011). Moreover, the loan officer justifies his act and provides the company with sufficient collateral so that in any contingency, the bank does not suffer. Explain how a rise in interest rates makes banks balance sheet riskier. The interest rate risk brings variation in the rates and reduces the earnings, as well as the value of the banks. As banks are the financial intermediaries it faces interest rate risk in several manners. When the rate enhances, the difference that is observed can lead to changes that are unexpected in nature in terms of cash flows, as well as earnings that are spread among various assets, liabilities and instruments that are off balance sheet (Carmichael Graham, 2012). Moreover, the balance sheet depicts immense risk because if the volatility is observed it will lead to losses of the banks and hence riskiness is observed. As the manager of a financial institution, what steps could you take to reduce the risks referred to in question 3? The best way to reduce the interest rate risk is to have a dominance on the competitive pressure, treasury and other activities that pertain to the investments. Banks can manage the interest risk only when it has a strong command over it. The step that can be taken is to constraint the lending and deposit functioning. This will help in beating the market risks and interest rate contracts can be controlled in a proper manner. The changes in the portfolio can be traced and accordingly the bank portfolio is determined (Brigham Daves, 2012). Supposed that a government decides to regulate more heavily the issuance of financial securities, like stocks and bonds Give an argument that this action will raise economic growth in the split land. When more of financial securities like bonds and stocks are issued it is done with a target that the overall economy will get a strong boost. This action has a direct bearing on the growth prospects. It is basically a strong step towards the growth facility because when this tends to help the business that is new to the arena. Hence, it is a step towards promotion of new business and supporting the old ones (Parrino et. al, 2012). Overall, it can be said that this will raise the level of economic growth because the business will be injected with finance facility. References Parrino, R., Kidwell, D. Bates, T 2012, Fundamentals of corporate finance, Hoboken, NJ: Wiley Carmichael, D.R. Graham, L 2012, Accountants Handbook, Financial Accounting and General Topics, John Wiley Sons. Choi, R.D. Meek, G.K 2011, International accounting, Pearson . Brigham, E. Daves, P 2012, Intermediate Financial Management , USA: Cengage Learning.