Download - Lecture Notes 8 on Sources of Finance
-
8/13/2019 Lecture Notes 8 on Sources of Finance
1/31
-
8/13/2019 Lecture Notes 8 on Sources of Finance
2/31
Introduction
Every entrepreneur planning a new venture
confronts the dilemma of where to find start
up capital.
It is important to understand the source ofcapital and requirements of these sources
Without this understanding an entrepreneur
may be frustrated with attempts to find start-upcapital.
-
8/13/2019 Lecture Notes 8 on Sources of Finance
3/31
Major source of finance
Debt
Equity
Bootstapping
-
8/13/2019 Lecture Notes 8 on Sources of Finance
4/31
Debt versus Equity
The use of DEBT to finance a
business involves a payback of funds
plus a fee (interest)EQUITY financing involves the sale of
some of the ownership in the venture.
Debt places a burden of repaymentwhereas equity forces the
entrepreneur to relinquish some
degree of control.
-
8/13/2019 Lecture Notes 8 on Sources of Finance
5/31
Choice
The choice of the entrepreneur
To take on debt without giving up
ownership in the venture or To relinquish a percentage of ownership
in order to avoid having to borrow.
In most cases, a combination of DEBTand EQUITY proves most appropriate.
-
8/13/2019 Lecture Notes 8 on Sources of Finance
6/31
-
8/13/2019 Lecture Notes 8 on Sources of Finance
7/31
Key Questions
To secure a bank loan an entrepreneur will
have to answer a number of questions
such as the following:
How much do you need?
When do you need it?
What do you plan to do with the money?
-
8/13/2019 Lecture Notes 8 on Sources of Finance
8/31
Advantages of Debt Financing
No relinquishing of ownership
More borrowing allows for potentiallygreater return on equity.
During periods of low interest rates theopportunity cost is justified because the
cost of borrowing is low.
-
8/13/2019 Lecture Notes 8 on Sources of Finance
9/31
Disadvantages of Debt
Financing
Remember (monthly) interest payments
are refunded.
Continual cash-flow problems can be
intensified because of paybacks
responsibility
Heavy use of debt can inhibit growth and
development.
-
8/13/2019 Lecture Notes 8 on Sources of Finance
10/31
Other Debt financing sources
Trade credit
Finance coys
Leasing coysMutual savings and loans
associations
Insurance coys
-
8/13/2019 Lecture Notes 8 on Sources of Finance
11/31
-
8/13/2019 Lecture Notes 8 on Sources of Finance
12/31
Examples Equity
Loan with Warranties
Convertible Debentures
Preferred stock Common stock
-
8/13/2019 Lecture Notes 8 on Sources of Finance
13/31
Public Offering
Going public is a term used to refer to a
business raising capital through the sale of
securities on the public markets
Advantages Disadvantages
Size of capital Cost
Liquidity Disclosures
Value Requirements
Image Shareholders
pressure
-
8/13/2019 Lecture Notes 8 on Sources of Finance
14/31
Venture Capital
Venture capitalista powerful source of equityfunding.
They provide a full range of services for new or
growing venture including the following:Capital for start-up and expansion
Market research and strategy for businesses that donot have their own marketing departments
Management consulting futureContacts with prospective customer
Assistance in negotiating technical agreements
Helping people management
-
8/13/2019 Lecture Notes 8 on Sources of Finance
15/31
Essential Elements for a
successful capital
Team Must:
Be able to adopt
Know the competition
Be able to manage rapid growth
Be able to manage an industry leader
Have relevant background and industry
experienceShow financial commitment to company not just
sweat equity
Be strong with a proven track record in the
industry unless the company is a startup or
-
8/13/2019 Lecture Notes 8 on Sources of Finance
16/31
Essential Elements for a
successful capital contd
Product must:
Be real and work
Be unique
Be proprietary
Meet a welldefined need in the marketplace
Demonstrate potential for product expansion, to
avoid being a one-product company
Emphasize usability
Solve a problem or improve a process significantly
Be for mass production with potential for cost
reduction.
-
8/13/2019 Lecture Notes 8 on Sources of Finance
17/31
Essential Elements for a
successful capital contd
Market must:
Have current customers and the potential formany more
Grow rapidly (25% to 45% per year)Have a potential for market size in excess of GH
250 million cedis
Show where and how you are competing in themarket place
Have a potential to become a market leader
Outline any barriers to entry.
-
8/13/2019 Lecture Notes 8 on Sources of Finance
18/31
-
8/13/2019 Lecture Notes 8 on Sources of Finance
19/31
Short-term and Long-term
Finance
The entrepreneur should have the
right amount of capital at the right
time to meet his financial requirement
Basing on the period, the
entrepreneur should arrange for twotypes of capital requirement.
-
8/13/2019 Lecture Notes 8 on Sources of Finance
20/31
Shortterm capital
requirement
Current assets (cash in hand)
Raw materials
Promotion of value
Operating losses
Advance to suppliers
Commission to getting agents
Interest on loans
Wages/salary
Consumables
-
8/13/2019 Lecture Notes 8 on Sources of Finance
21/31
Sources of short-term finance
Sales of fixed assets
Reserves
Provision of taxation
Accrued expenses
Credit papers Customers credit
Commercial banks
Indigenous bankers
Government assistance Loans from directors
Security of employees
Factoring
-
8/13/2019 Lecture Notes 8 on Sources of Finance
22/31
Long-term capital requirement
Some assets are needed the whole life
of he entrepreneur or five years and
above.
Long-term capital is required to meet
for example, the following items:
Building intangible assets like goodwill,vehicles, plants etc.
-
8/13/2019 Lecture Notes 8 on Sources of Finance
23/31
Sources of long-term finance
Internal sources (ownership capital)
Equity shares
Preference sharesReinvestment of earnings
Personal funds
Family and friendVenture capital
Other sources
-
8/13/2019 Lecture Notes 8 on Sources of Finance
24/31
Sources of long-term finance
External sources (borrowed capital)
Debentures
Long-term loans
Public loans
Bank loans
State financingPrivate lenders
Institutional financing
-
8/13/2019 Lecture Notes 8 on Sources of Finance
25/31
Bootstrap Financing
Meaning
Bootstrapping is building a business with little
or no capital.
The entrepreneur uses imagination, ingenuityand hard work instead of seeking outside
finance.
Bootstrap finance often has to do with notraising money and not spending it either, but
finding creative ways to achieve your
objectives.
it is often not to do with obtaining finance at
-
8/13/2019 Lecture Notes 8 on Sources of Finance
26/31
BOOTSTRAP FINANCE
Principles:
Get operational fast
Look for quick break-even
Cash generating projects
Offer high-value products or services that can
sustain direct personal selling
Dont try to hire the crack team Keep growth in check
Focus on cash and
Cultivate banks early.
M it
-
8/13/2019 Lecture Notes 8 on Sources of Finance
27/31
Merits
It is one of the most inexpensive ways to raise
capital for your business.
Bootstrap financing also looks good to outside
lenders when the time comes to raise moneythrough these routes.
It also makes your business more valuable
since no money was borrowed and no equitypositions of the company had to be given up.
Also there is no interest that must be
paid since the money you get is generated
from your own business and it's resources.
D it
-
8/13/2019 Lecture Notes 8 on Sources of Finance
28/31
Demerit
The biggest downside of bootstrapping is that
self-financed firms are on a low-cash diet.
They tend to be capital-starved, making it
difficult to grow quickly. Of course, fast growthisn't necessarily a goal of most business
founders. Very often, taking the frugal path is
the best or only option for getting a business
off the ground.
-
8/13/2019 Lecture Notes 8 on Sources of Finance
29/31
Types of Bootstrap Financing
Factoring- Using your accounts receivable to
generate cashflow by selling them to a
"Factor," at a discount, in exchange for cash.
Trade Credit- If your business can find avendor or supplier to extend trade credit and
allow you to order goods on net 30, 60, or 90
day terms, that is another form of bootstrap
financing you could use.
-
8/13/2019 Lecture Notes 8 on Sources of Finance
30/31
Customers- Your business can use a letter of
credit from your customer to purchase
materials without using any company
resources. Real Estate-Leasing, refinancing, and
borrowing against equity is a great way for a
company to generate capital by using its own
assets.
Leasing-Free up cash by leasing equipment
rather than purchasing outright.
S t b t t
-
8/13/2019 Lecture Notes 8 on Sources of Finance
31/31
Seven ways to bootstrap your
business
1. Slow down supplier payments.
2. Speed up customer payments.
3. Frugal businesses start at home.
4. Start out part-time.5. Share your office.
6. Lease, don't buy equipment.
7. Barter for services and products.