When starting a business, an entrepreneur often faces a choice among various financing types. Justification means giving reasonable grounds why one choice is more suitable than another.
Factors weighed
- Amount needed — a small amount suits the owner's own capital; a large amount may need a loan or investors.
- Cost of financing — choose the source with the lowest interest or cost for the same purpose.
- Risk and repayment — a new entrepreneur with uncertain income may avoid heavy fixed instalments.
- Control — to keep full control, avoid sources that hand over ownership.
- Purpose of use — fixed assets suit long-term financing; daily cash needs suit short-term sources.
Example
A graduate starts a small catering business. She chooses RM10,000 of her own capital rather than a bank loan because the amount is small, she wants to avoid an interest burden, and she wants to keep full control — a reasonable justification for a new business.
Remember
There is no absolute answer; justification depends on the real situation of the business. A good exam answer states the choice and the reasons supporting it.
Justification for different needs
Justification changes with the situation of the business. Now imagine an entrepreneur who wants to open a large-scale bakery and needs RM300,000 for machinery. Here, own capital is not enough, so a term loan is more reasonable despite the interest, because the machinery is a long-term asset that generates income to repay the loan. The justification is: a large amount, a long-term investment purpose, and the ability to repay from future sales. Comparing these two scenarios shows that the suitable financing type depends on the size of the need, the purpose and the entrepreneur's risk profile. A strong justification always links the choice to the specific situation of the business, not merely stating a choice in general.
By giving justification, an entrepreneur shows mature thinking and reduces the risk of making the wrong financial decision at the early stage of the business.