Introduction
Given the scale of the business and the limited previous experience of the partners, the most suitable legal framework for a shop is a private limited company. Choosing this framework would offer possible financial underperformance that is likely to occur at the initial stage of development. It can also offer better taxation options than partnership and sole trader. Next, it will grant opportunities for employment on a local scale, which was stated as one of the goals of the endeavor. Most importantly, this framework offers better flexibility for seeking funding opportunities and investment options. Since the business does not have either a feasible resource base or an established brand name, its emphasis will likely be on innovation and differentiation from existing alternatives. Considering this, the framework should be as unrestrictive as possible in terms of strategic decisions (making franchise unsuitable) while at the same time offer a decent level of legal protection for inexperienced owners.
Asset-Based Financing
If a business has an asset (e.g. property), it can seek funding based on this fact. The asset can be monetized, and the business will receive the funds based on the asset, and the company who serves as an intermediary will then invite investors to participate in the created agreement by paying the loan. Such a source of funds is cheaper than the bank loan for both sides and does not require a delay before the lenders arrive (Wolters Kluwer, 2014). However, it requires the presence of assets (e.g. the building at the disposal of one of the partners).
Crowdfunding
Such an approach is a recent phenomenon based on the potential of web information technologies. It allows a business owner to seek investors at the cost of borrowing significantly lower than that offered by bank loans. However, its most important advantage is the possibility to reach out to any number of investors at once and add transparency to the funding process. While it may be hard to find the required amount of funds for a young business with no established reputation (very few investors would willingly take the risk), it is possible to secure several dozens of smaller sums (implying lower risk), which makes crowdfunding an appropriate funding option. Unfortunately, due to its relatively young age, the concept is not backed with sufficient legal support from the government, which may repel lenders (Wolters Kluwer, 2014).
Equity Crowdfunding
A variation of crowdfunding where the investors obtain their share of equity in the business (Wolters Kluwer, 2014). It offers most of the advantages of the option discussed above, such as accessibility, flexibility, and ease of reaching a lender. However, obtaining a share of equity means that the lender will be more attentive to growth opportunities displayed by the business, which decreases the possibility of successful funding for a small community-based shop. In addition, such an option is complicated by legal issues, such as the restriction of investing more than 10% in equity crowdfunding over a 12-month period (Wolters Kluwer, 2014).
Reward-Based Investment
A variation of crowdfunding takes advantage of intangible rewards such as gifts and souvenirs. It can take the form of giving some item or service (preferably unique or limited in supply) in return for the investment. This approach can diversify the investment and downscale them to the amounts which can be handled by the members of the local community. One weakness that must be acknowledged is the necessary prerequisite of an established reputation. The customer base must be loyal enough to be willing to invest in the business without any returns (Wolters Kluwer, 2014). Therefore, its success in the initial stage is unlikely.
Angel Investors
An opportunity to secure an investment in return for an equity stake. It is usually decided on a more personal level than equity crowdfunding, which raises the chances to succeed for a small business. Furthermore, angel investors usually pay attention to outstanding ideas rather than a robust business strategy and permit some leeway for young entrepreneurs confronted by difficulties (UK Business Angels Association, 2015). Therefore, this is another appropriate option for our business.
Reference List
Hoskin, J., 2014. Company formation: Should I go sole trader, partnership or limited company? [online]. London: SmallBusiness. Web.
Lobel, B., 2016. What is a franchise? Advice for small businesses [online]. London: SmallBusiness. Web.
UK Business Angels Association, 2015. Introduction to angel investment [online]. London: UKBAA. Web.
Wolters Kluwer, 2014. Alternative financing: Show me the money [online]. London: CCH. Web.