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If you were to start a new business, would you consider issuing debt or equity to finance the business?
DEBT
Yes No
NUMBER OF RESPONDENTS
5 4
Some reasons given for choosing debt over equity were that although "it can be risky if a business does not perform or owners are not disciplined, it's a good option as you use the bank's money to finance the business. The business gets to pay off the loan, which does not affect your personal finances." Others stated that it is the only way to grow one's business and it is quite safe as it is a bank and they offer fair interest rates. It was also mentioned that a small manageable amount is good as it will also provide the owner with a credit record for future capital requirements as an entrepreneur. Another respondent went on to say that one should rather avoid debt unless you are forced to go into debt to finance a business. Those who said they would not issue debt to finance a new business stated that it should be avoided as far as possible.
EXTERNAL EQUITY
Yes No
NUMBER OF RESPONDENTS
4 5
The reasons given for choosing external equity were that they would rather have a small business free of external equity than to be involved with other people. One mentioned that once you have invested in equity you have to ensure the business succeeds at all cost. The rest stated that they would issue equity to finance a new business reasons being although you lose the autonomy to manage the business your own way and always have to share the profits, it is cheaper financing as interest rates are lower.
Three participants said they would issue neither debt nor external equity to finance a new business. They believe that debt is a bad way to start a business unless one could be sure of success (much research is needed to establish if there will be good profitability), they know that it is risky from previous experience and that it can be a dangerous trap if you cannot keep up with the interest and
capital repayments. They would rather retain control of their businesses. In terms of external equity the participants think that one should be able to fund oneself without external help as it becomes risky and one doesn't want to lose more by borrowing or owing interest. According to the respondents equity from outsiders removes the independence of small business owners and is almost a requisite for larger business equities. They would rather keep the business within the family.
From the above comments it can be concluded that most business owners in Grahamstown, comparing debt and equity, would rather issue debt to finance a new business mainly because it is too risky to involve third parties. Issuing external equity is not so popular to the extent that given it was the only option used to finance businesses, one participant would rather remain with the current small business and not grow it in any manner.
FACTORS AFFECTING CAPITAL STRUCTURE DECISIONS: A SMALL BUSINESS PERSPECTIVE 189