Financing The Venture: Week15 - Enmgmt1

FINANCING THE
VENTURE
WEEK15_ENMGMT1
Financing the Venture
• Capital is any form of wealth
employed to produce more
wealth.
• Three forms of capital are
commonly identified:
1. Fixed capital,
2. Working capital
3. Growth capital
Fixed capital
• is used to purchase a company’s
permanent or fixed assets;
• Main types of company’s fixed assets:
• land
• building
• Equipment
• Money invested in fixed asset tends to be
frozen because it cannot be used for any
other purpose
Working capital
• Represents the business’s
temporary funds and is used to
support the business’s normal short-
term operations;
• Current assets minus current
liabilities;
• Used to buy inventory, pay bills,
finance credit sales, pay wages and
salaries and take care of unexpected
emergencies.
Growth capital requirements
• surface when an existing business is
expanding or changing its primary
direction
• finances expansion or purchasing new

buildings, hiring additional workforce,
increasing inventory.
Sources of Capital
1. Owner’s Equity
2. Friends and Family
3. Angel investors
4. Commercial loans
5. Trade or supplier credit
6. Leasing companies
7. Venture capital companies
8. Commercial finance companies
Owner’s Equity
•At the first stage of financing,
entrepreneurs usually invest
their own funds. Coming from
the owner’s personal savings.
Friends and Family
• Raising financial capital from friends
and family is a common approach for
entrepreneurs launching a new
venture. Friends and family are more
likely to invest in a venture because
of the personal relationship
established with them over time.
Angel investors
• includes any individual who invests his
or her own money in a new venture,
typically in return for equity in the
venture.
• Angels range from professionals, such
as doctors and lawyers, to successful
entrepreneurs who are now seeking to
finance one or more new ventures.
• Angels are private investors who not
only invest their money in small
companies, but they also offer valuable
advice and counsel to them.
Commercial loans
• 4.1. Short-term commercial loans
(30 to 90 days) are the most common
loans made to a small business. They
usually cover business operation
expenses such as rent, insurance,
advertising, inventory or salaries.
Short-term loans are often
unsecured and repayment is usually
a lump sum, including interest when
the loan matures.
Commercial loans
• 4.2. Long-term commercial loan is for
five years or more to purchase an
existing business, buy real estate, or
construct or improve a building or
facility. The long-term loan is always
secured by the assets for which the
loan was made, usually requires
constant monthly payments and often
has a variable interest rate.
Trade or supplier credit
• Payment terms offered by suppliers
are a potential source of credit.
Study the discounts for early
payment and the penalty for late
payment to determine the true cost
of the credit. While some suppliers
will extend credit only to well-
established, proven firms, many will
extend limited credit to new
businesses to encourage another
outlet for their merchandise.
Leasing companies
• Leasing business equipment is
another way to reduce capital needs.
Everything from office furniture to
food processing equipment can be
obtained from leasing companies or
commercial finance companies.
Leasing is generally more expensive
than bank financing and is limited to
items that have a long serviceable life,
widespread use, and are easily
repossessed in the event of default.
Venture capital companies
• Are for-profit, professional investors
looking for fast-growing companies in
“hot” industries. When screening
prospects, venture capital firms look
for competent management, a
competitive edge, a growth industry,
and important intangibles that will
make a business successful.
Commercial finance
companies
• Offer many of the same types of loans
that banks do, but they are more risk
oriented in their lending practices. They
emphasize accounts receivable
financing and inventory loans.
BUSINESS INCUBATORS
Business incubators (or "accelerators")
generally focus on the high-tech sector by
providing support for new businesses in
various stages of development. However,
there are also local economic development
incubators, which are focused on areas
such as job creation, revitalization and
hosting and sharing services.
BUSINESS INCUBATORS
Commonly, incubators will invite future
businesses and other fledgling companies to
share their premises, as well as their
administrative, logistical and technical
resources. For example, an incubator might
share the use of its laboratories so that a new
business can develop and test its products
more cheaply before beginning production.
BUSINESS INCUBATORS
Generally, the incubation phase
can last up to two years. Once the
product is ready, the business
usually leaves the incubator's
premises to enter its industrial
production phase and is on its own.
GOVERNMENT GRANT AND
SUBSIDIES
Getting grants can be tough. There may
be strong competition and the criteria for
awards are often stringent. Generally,
most grants require you to match the
funds you are being given and this amount
varies greatly, depending on the granter.
For example, a research grant may
require you to find only 40% of the total
cost.
SUBSIDIES
Generally, you will need to provide:
• A detailed project description
• An explanation of the benefits of your project
• A detailed work plan with full costs
• Details of relevant experience and
background on key managers
• Completed application forms when
appropriate
SUBSIDIES
Most reviewers will assess your
proposal based on the following
criteria:
• Significance
• Approach
• Innovation
• Assessment of expertise
• Need for the grant
SUBSIDIES
Some of the problem areas where
candidates fail to get grants include:
• The research/work is not relevant
• Ineligible geographic location
• Applicants fail to communicate the
relevance of their ideas
• The proposal does not provide a strong
rationale
• The research plan is unfocused
• There is an unrealistic amount of work
• Funds are not matched

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FINANCING THE

• finances expansion or purchasing new

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