Reference no: EM133428930
CASE STUDY
When Ananda and Suda Kumar opened their bookstore one year ago in Perth, Western Australia, they estimated it would take six months to break even. Because they had gone into the venture with enough capital to keep them afloat for nine months they were sure they would need no outside financing. However, sales have been slower than anticipated and most of their funds now have been used to purchase inventory or meet monthly expenses. On the other hand, the store is doing better each month and the Kumars are convinced they will be able to turn a profit within six months.
At present, Ananda and Suda want to secure additional financing. Specifically, they would like to raise $100 000 to expand their market channels. The store focuses on how-to-do-it and do-it-yourself (DIY) books and is developing a loyal customer following. However, they feel the local market reach is not large enough to help them grow the business as they planned. The Kumars feel that if they expand into an online store, they can develop both market segments that, when combined, will lift their profitability. Suda is convinced that their chosen market segment has potential and she has tagged news items online and in newspapers and magazines reporting increases in online sales. Suda cites Amazon as an example of the possibilities. People who buy DIY books tend to spend more time online and are prepared to pay to get the best information. Additionally, customer loyalty among this group tends to be very high.
The Kumars own all of their inventory, which has a retail market value of $280 000. The merchandise cost them $140 000. They also have at a local bank a line of credit of $10 000, of which they have used $4000. Most of their monthly expenses are covered out of the initial capital with which they started the business ($180000 in all). However, they will be out of money in three months if they are not able to get additional funding.
The owners have considered investigating a number of sources. The two primary options are a loan from their bank or approaching their uncle back in Malaysia who has recently sold his highly successful electronics components manufacturing business. However, one of their friends has also mentioned crowdfunding. They know nothing about how to raise money and these are only general ideas that they have been discussing with each other and that they plan to discuss further at the next meeting with their accountant. For the moment, the Kumars are focusing on writing a business plan that spells out their short business history and objectives, and explains how much money they would like to raise and where it would be invested. They hope to complete the plan by the end of the week and take it with them to the accountant. The biggest problem they are having in writing the plan is that they are unsure of how to direct their presentation. Should they aim it at a banker, their uncle or a crowdfunding campaign? After their meeting with the accountant, they plan to refine the plan and direct it toward the appropriate source.
QUESTIONS
1. Would a commercial banker be willing to lend money to the Kumars? How much? On what do you base your answer?
2. What would be the advantages of approaching their uncle and what would be the risks if he said yes? Should they consider debt or equity with a family member?
3. Would a crowdfunding campaign be the right avenue? After all, they want to grow the business online, so why shouldn't they use this same channel to raise funds? Be complete in your answer and describe why or why not this form of capital raising would be suitable.