Chapter-9

MOBILIZATION OF FINANCE
FOR NEW STARTUPS
 BUSINESS FINANCE
What is business finance?
Business finance refers to Money and Credit employed in business.

What is called Financing?

Financing is an act of providing funds for business activities.
It involves procurement and utilization of funds so that business firms may be able to
execute their operations efficiently and effectively.

The main characteristics of business finance:-

1.Business finance includes all types of funds used in business.
2. Business finance is needed for all types of business, small or big.
3.The amount of business finance differs from firm to firm depending upon its nature, size .
4.It is concerned with raising of funds from different sources as well as investment of
funds for different purposes.
 ********Sources of Capital for Entrepreneurship.
Q-Briefly explain various sources of Finance for a Startup company/an
Entrepreneurship?
1. Boot strapping
• What is Bootstrap?:- Bootstrapping is a term used in business to refer to the
process of using only existing resources, such as personal savings, personal
computing equipment, and garage space, to start and grow a company. It’s about
stretching what you’ve got – whatever that is – to get the job done.
• This approach contrasts with bringing on investors to provide capital or taking on debt
to fund a business’ expansion. Bootstrap is a situation in which an entrepreneur starts
a company with little capital. An individual is said to be bootstrapping when he or she
attempts to found and build a company from personal finances . – It is a Primary types
of Funding. Bootstrapping is one of most effective and inexpensive ways to
ensure a business' positive cash flow. Bootstrapping means less money must
be borrowed and interest costs are reduced.
(2) Personal funds, family and friends:- Entrepreneurs rely on various sources
of capital to finance their venture, but they, mostly rely on personal funds which
are least expensive in terms of cost and control. Using personal funds is very
important in attracting external financial resources such as banks, privates
investors, venture capitalists. Friends and families are another conventional
source of fund that is limited and their expectation of getting back a good return
is set in an informal way.
(3)Debt Financing: Debt financing is when the company gets a loan and
promises to repay it over a set period, with a set amount of interest. The loan can
come from a lender, like a bank, or from selling bonds to the public
Debt financing occurs when a firm raises money for working capital or capital
expenditures by selling debt instruments to individuals and/or institutional
investors. In return for lending the money, the individuals or institutions become
creditors and receive a promise that the principal and interest on the debt will be
repaid.
The common Debit Finance Sources are;
1.State Financial Corporations (SFCs),
2. Non-banking Finance Corporations (NBFCs).
3. Banks, which includes foreign banks, nationalized banks, private banks,
etc
Procedure For Securing Debt Finance:-
1. Drawing up the business plan.
2. Identifying sources of debt finance.
3. Presenting the proposal to the bank.
4. Going for further talks.
5. Working out details.
6. Purpose is significant for the banks.
7. Safety (Collateral, margin money, guarantees etc).
Contd….
7. Profitability (bank).
8.Collateral (inside collateral & outside collateral)
9. Personal Guarantee.
10. Maturity (issuing credit limit).
11. Debt Covenants
12. Menu Pricing.
13. Lending strategies of banks.
(A). Financial statements.
(B). Relationship lending.
© Credit scoring.
 DEBT FINANCING
• Advantages • Disadvantages
• No relinquishment of • Regular (monthly) interest
ownership is required. payments are required.
• More borrowing allows for • Continual cash-flow problems
potentially greater return can be intensified because of
on equity. payback responsibility.
• During periods of low • Heavy use of debt can inhibit
interest rates, the growth and development.
opportunity cost is
justified since the cost of
borrowing is low.

© 2012 Cengage Learning. All rights reserved.

(4). EQUITY FINANCING
Definition:-Equity financing is the process of raising capital through the sale of
shares in an enterprise. Equity financing essentially refers to the sale of an
ownership interest to raise funds for business purposes.

Equity financing is defined as getting funds for the company in exchange for
ownership.
Nature:
Many entrepreneurs prefer to raise money through equity rather than debt. It is
appealing, since it feels like free money at the start up. Furthermore, there is no
need for collateral and usually no obligation to repayment.

Characteristics:-
• Money invested in the venture with no legal obligation for entrepreneurs to repay
the principal amount or pay interest on it.
• Funding sources: public offering and private placement.
© 2012 Cengage Learning. All rights reserved.
Sources of Equity Financing
(1) Initial Public Offering (IPO)& FPO:- IPO, is the first sale of the stock to the public
by an entrepreneur and equity owners, usually small and young companies, through offer
and sell of some parts of the company in public market via registration statement with the
security Exchange Board of India. IPO has three main advantages, which are obtaining new
equity capital, being provided with more liquidity and consequently realizing an enhanced
valuation and increasing the ability of the company for getting future funds.

(2) Business Angels:- The Business Angels or private investors are those who can be
wealthy friends and families, or another individual. Business angels are those who
invest their capital in fresh ventures, and are commonly entrepreneurs who have
liquidated their company and are willing to invest their money or are the retired high
executives of the large companies.
3. Venture Capitalists (VCs):- Venture capital is a form of private equity and a type
of financing that investors provide to startup companies and small businesses that are
believed to have long-term growth potential. Venture capital generally comes from
well-off investors, investment banks and any other financial institutions.
 What are the Key differences between Business Angels and Venture
Capitalist?
1. Business angel (Angel investors) are individuals, often successful businesspeople, who
are using their own funds to invest in businesses they like, whereas a Venture
Capitalist is a person or firm that invests in small companies, generally using money
pooled from investment companies, large corporations, and pension funds. Typically,
VCs do not use their own money to invest in companies.
2. Business Angels typically invest in early-stage business and startups, which also
means that they face a higher risk, Whereas the Venture Capitalist, are less interested
in early-stage businesses and prefer more established businesses.
3. Business Angels aims for Longer investment period whereas the Venture Capitalist
looks for shorter investment horizon.
4. Venture capitalists might expect a return on investment anywhere between 25% and
35%. Angel investors may want a return between 20% and 25%. Examples of VCs:-
Helion Venture Partners, Accel Partners, Intel Capital India, etc
5. Corporate Venture Capital (CVC).
Corporate venture capital (CVC) is the investment of Corporate funds directly in
external startup companies. CVC is the "practice where a large firm takes an equity
stake in a small but innovative or specialist firm, to which it may also provide
management and marketing expertise.

Objective of CVC:-“Strategic and Financial Objectives.

(a) Strategically driven CVC investments are made primarily to increase, directly or
indirectly, the sales and profits of the incumbent firm’s business. A well-established
firm making a strategic CVC investment seeks to identify and exploit synergies
between itself and the new venture.
(B)The next objective is to exploit the potential for additional growth within the parent
firm. For instance, investing firms may want to obtain a window on new technologies,
to enter new markets, to identify acquisition targets and/or to access new resources.
Examples of CVCs include Google Ventures and Intel Capital.
Explain the differences between VC & CVC?
 5. GOVERNMENT GRANTS AND SUBSIDIES
Government agencies provide financing such as grants and subsidies that may
be available to your business, on fulfillment of following criteria:-
• 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.
6. Business Incubators
A business incubator is a company that helps new and startup companies to
develop by providing services such as management training or office space. It
usually provides affordable space, shared offices and services, hand-on
management training, marketing support and, often, access to some form of
© 2012 Cengage Learning. All rights reserved.
financing
 SKILL DEVELOPMENT:
1. Prepare a project report to start an SSI unit.
2. Draft a letter to the concerned authority for seeking license to start an SSI
unit.
3. Prepare a format of Business plan .
4. A report on the survey of SSI units located in the region.
5. Financial assistance chart for SSI units.
6. Any one success story of an Entrepreneur of the region.
7. List Tax concessions available to SSI units under direct and indirect taxes.

Above given 07 assignments (skill development) are compulsory for all

students.