Final answer:
Amy Blackwood should complete a cash flow forecast to demonstrate her ability to repay a bank loan for expanding her business. Understanding different capital raising options and the associated risks, including loan default risks, is critical for making an informed decision.
Step-by-step explanation:
Amy Blackwood is seeking financial capital to expand her plumbing business through a bank loan, and the bank has requested a cash flow forecast to ensure she can manage the repayments. There are several ways a firm can raise capital such as from early-stage investors, reinvesting profits, borrowing, or issuing stock. Each option has its pros and cons, but if Amy wants to maintain full ownership of her business, getting a loan might be preferable to issuing stock. However, issuing stock can raise substantial funds without the need to pay back debt, albeit with the trade-off of diluted ownership and potential changes in company control.
The bank factors in the riskiness of loaning financial capital because a percentage of borrowers may not repay. This risk assessment is crucial for Amy to understand as she considers not only whether to borrow, but also how much to borrow, the loan terms, and her repayment strategy.
In considering the student's question and the options provided, while alternative financing might be an option, it's essential that Amy weighs these against the terms of the bank loan. Completing a cash flow forecast is a fundamental part of this decision-making process, as it will provide a clearer picture of projected incomes and expenses and how the loan repayments fit into that.