JAC Solutions is a new business idea that is yet to be established. Mrs.

Bell has
considerable savings in her own pocket but not enough to start such a large business.
She has consider outside sources in order to fund the business especially at the start up
stage. The funds required at the start up stage is considerably high, mainly because it
involves establishment costs such as purchase of assets as well as other startup costs
such as licensing fees. Moreover the initial working capital is also required to start the
business since the business has no previous activity from which the working capital
would be garnered. Only one source of finance is unlikely to raise 800,000 which is the
estimated cost of starting the business. Funds have to sourced from several sources to
start the business.
The sources of finance available to Mrs. Bell to start JAC Solutions are as follows:

Venture Capitalist
Personal Savings
Loan from Friends and Family
Leasing and Mortgage
Bank Loan

Since JAC Solutions will be sole proprietorship other sources such as selling shares are
unavailable to the business.
The various sources available for JAC Solutions has already been discussed above.
The implications of the various sources are wide. There are unique advantages and
disadvantages to each of the source of finance identified above and considering all
these implications the business will have to arrive at a solution.
There are 4 major types of implications that each of the sources will face. These are:

Legal Implication
Cost Implication
Insolvency Implication
Dilution of Control Implication

Personal Savings has the least implications in almost all the categories. It has no legal
implications since it is the owners own money and she has full legal right. Insolvency
will simply result in the loss of the money and there will be no dilution of control.
However although the business does not have any cost implication with this source,
there is an opportunity cost associated with this money for Mrs. Bell. This means that
this money could have been spent elsewhere where she might have gotten a return
such as stocks. Giving that up is the cost for Mrs. Bell.

Venture Capitalist are beneficial in the sense they risk their money for your business.
They also help build industrial connections during the startup phase which greatly
boosts the company. However they too have implications. The legal implications are
usually very high and there is considerable costs involved as a contract is usually
required to be signed by both parties before the venture capitalist will provide any
finance. There is also not much cost implication as the investor usually has a stake in
the profit rather than any other aspect of the business. However the dilution of control is
great with venture capital. The VC usually puts the business under great scrutiny and
dictates various control conditions when providing the finance such as capping
employee salaries. This can be said to be a long term finance.
Bank Loan tends to be smaller than venture capitalist but quite large in general. There is
however a large cost implication associated with it with interest expenses. Moreover
banks are highly unwilling to lend money to new businesses especially sole
proprietorships. The implications for insolvency is also very high for Mrs. Bell. Sole
traders usually has unlimited liability which means that if the company fails to pay the
loan back in time the bank may seize assets of the owner in order to make up for the
loan. This creates great hassle. However it is better than venture capitalist in the sense
that there is no dilution of control when taking bank loans.
Property purchases are a long term investment and requires large financing. Long term
investments should always be met with long term financing since it maximizes the
advantages. In such a case there are two long term financing available for the purchase
of property. They are loan and a mortgage.
A loan is generally defined as the relationship between the lender and the borrower.
The lender is also known as a creditor whereas the borrower is known as the debtor. In
this case the bank is the lender who will be providing the loan to the borrower Mrs. Bell.
The amount loaned is also known as the principle amount needs to be returned within a
stipulated time by the borrower. However the borrower must also pay interest usually
monthly or annually on the outstanding amount yet to be paid till the entire loan is paid
off. Failure to abide by the conditions of the loan results in the bank taking legal actions
against the borrower. In this case failure to pay back the loan would result in the seizure
of Mrs. Bells personal assets to the value of the loan by the bank, if Mrs. Bell defaults
on the loan.
A type of loan secured with real estate or property is known as mortgage. It is generally
used to purchase any kind of property. For the duration of the loan the owner of the
property is usually the bank or the mortgage broker that is lending the money. It works
exactly like a loan, however in the case of defaulting the bank reclaims the property
instead of any personal assets, even if the value of the property is not equivalent to the
loaned amount anymore.

Considering both the above cases, a mortgage is a more secured long term finance
decision than a general loan. This is because although costs in both the cases are
usually similar, the mortgage risks only the property, while a general bank loan may
endanger other personal assets as well if the property value dips at the time of failing to
pay. Therefore after the evaluation I would suggest to use mortgage.
Other long term finance that can be used but is not applicable in this case is the selling
of shares. Although this dilutes existing ownership and threatens the control structure, it
gathers a large amount of fund from new or existing shareholders of the business with
not much costs associated with it. Since Mrs. Bell runs a sole proprietorship this does
not apply here.
Mortgages usually work similar to a loan with interests being accumulated every month
on the outstanding amount yet to be paid. However mortgage schemes require, the
borrower to pay the amount back in simple annuity based installments so that they
entire amount is paid off by the stipulated time without needing to make any large
payments except for the initial deposit. Although data for interest date does not exist at
the moment for Mrs. Bell to do a better cost calculation, but we can safely assume that
the minimum instalment amount would be no less than 11,200. This is calculated on
the basis of zero percent interest per year which is highly unlikely. This amount plus
interest would have to be paid every year on a monthly basis for the next 25 years in
order to complete the mortgage.
A bank loan on the other hand would have been for only 12 years. The interest rate
would have been similar but the principal amount would be much larger. Therefore if
Mrs. Bell did plan on paying it back in installments, then each of the installment would
have been much greater than that of the mortgage payment. This means that the bank
loan would increase costs of the business more than the mortgage but would stop at 12
years whereas the mortgage would probably go on for 25 years. The total cost of
mortgage is also likely to be higher since interest is being accumulated for longer
periods.
Although shares are not an option the cost of shares would probably have been the
lowest. Only dividends need to be paid out to shareholders and that too only when the
company makes a profit. The directors of the company can also choose not to give a
dividend even when the company is making a profit and retain it instead but that would
greatly reduce shareholder interest in the company and make it more difficult to sell
shares in the future. Moreover the principal amount that is raised from selling the shares
need not be repaid any time in the future. The only disadvantage lies in the sharing of
the ownership.