UNIT III

Sources of finance - Various sources of Finance available - Long term sources - Short term sources -
Institutional Finance – Commercial Banks, SFC's in India - NBFC's in India - their way of financing
in India for small and medium business - Entrepreneurship development programs in India - The
entrepreneurial journey- Institutions in aid of entrepreneurship development

Sources of finance: -

1. Internal Sources:
o Owner’s Capital: Personal savings or assets invested by the business owner.
o Retained Earnings: Profits reinvested in the business instead of being
distributed as dividends.
o Sale of Assets: Selling unused or surplus assets to raise funds.
2. External Sources:
o Debt Financing:
▪ Bank Loans: Borrowed funds that need to be repaid with interest.
▪ Trade Credit: Deferred payments to suppliers.
▪ Bonds: Issuing debt securities to investors.
▪ Leasing: Renting equipment or property instead of purchasing.
▪ Factoring: Selling receivables to a third party for immediate cash.
o Equity Financing:
▪ Venture Capital: Investment from firms in exchange for equity,
usually for high-growth businesses.
▪ Angel Investors: Individual investors providing capital in exchange
for equity.
▪ IPO: Offering shares to the public for the first time.
▪ Private Equity: Investment from private firms for a controlling
interest in a business.
▪ Crowdfunding: Raising small amounts of money from a large number
of people.
3. Government Support:
o Grants/Subsidies: Financial assistance from the government, typically for
specific sectors or projects.
4. Hybrid Sources:
o Convertible Debt: Debt that can be converted into equity.
o Mezzanine Financing: A mix of debt and equity, often used for expansion.

Each source has its pros and cons depending on the business's needs, stage, and goals.

Brief Overview of Sources of Finance: -

1. Internal Sources:
o Owner’s Capital: Personal savings invested by the owner.
o Retained Earnings: Profits kept in the business for reinvestment.
o Sale of Assets: Selling unused assets to raise funds.
o Depreciation: Reinvesting funds from asset depreciation.
2. External Sources:
o Debt Financing:
▪ Bank Loans: Borrowed funds from banks with interest.
▪ Trade Credit: Deferred payments to suppliers.
▪ Bonds: Debt securities issued to investors.
▪ Leasing: Renting assets instead of buying.
▪ Factoring: Selling receivables to a third party for quick cash.
o Equity Financing:
▪ Venture Capital: Investment from firms for equity in startups.
 ▪ Angel Investors: Individual investors providing early-stage funding.
▪ IPO: Offering shares to the public.
▪ Private Equity: Investment by private firms for ownership.
▪ Crowdfunding: Raising funds from a large group via online
platforms.
3. Government Grants and Subsidies:
o Grants: Non-repayable funds from the government.
o Subsidies: Financial assistance for specific activities or sectors.
4. Hybrid Financing:
o Convertible Debt: Loans that can be converted into equity.
o Mezzanine Financing: A mix of debt and equity.
5. Alternative Financing:
o Peer-to-Peer Lending: Borrowing from individuals via online platforms.
o Revenue-Based Financing: Funding based on a percentage of future
revenues.
6. Trade Finance:
o Letters of Credit: Bank guarantees for payment upon fulfilling contract
terms.
o Export Credit: Financing for international trade.

Each source offers different advantages, depending on the business's needs, stage, and
financial situation.

Long-Term vs. Short-Term Sources of Finance: -

The distinction between long-term and short-term sources of finance is based on the
duration for which the funds are required and the repayment period. Here’s a breakdown:

1. Long-Term Sources of Finance

These sources are used for financing long-term business activities, such as expansion, asset
acquisition, and infrastructure development. The repayment period generally extends beyond
one year.

• Equity Financing:
o Venture Capital: Investment from firms in exchange for equity, typically for
high-growth startups.
o Angel Investors: Individuals providing capital for a stake in the business.
o Initial Public Offering (IPO): Selling shares of the company to the public for
long-term capital.
o Private Equity: Investment by private firms in exchange for ownership stakes
in a business.
• Debt Financing:
o Bank Loans: Long-term loans from financial institutions, with repayment
over several years.
o Bonds: Debt securities issued to investors, with repayment typically over a
long period (5+ years).
o Debentures: Long-term unsecured debt that is repaid over several years.
• Leasing: Long-term leases for assets like property, equipment, and vehicles, where
ownership is not transferred but usage rights are granted for several years.
• Retained Earnings: Profits that are kept in the business and reinvested for future
growth and expansion.
2. Short-Term Sources of Finance

These sources are used for financing immediate or short-term needs such as working capital,
seasonal fluctuations, or day-to-day operations. The repayment period is generally less than
one year.

• Bank Overdrafts: Short-term borrowing allowing a business to withdraw more than

its available bank balance, often with flexible repayment terms.
• Trade Credit: Short-term credit extended by suppliers to businesses, allowing them
to buy goods and pay for them later (typically 30-90 days).
• Bank Loans (Short-Term): Loans with a repayment period of less than one year,
usually used for immediate working capital needs.
• Factoring: Selling accounts receivable to a third party (a factor) for immediate cash,
with the factor taking responsibility for collecting the debts.
• Short-Term Borrowing: Quick loans or lines of credit from banks or other lenders,
often due for repayment within a few months.
• Commercial Paper: Unsecured, short-term debt instruments issued by corporations,
typically maturing in less than a year.
• Invoice Financing: Using outstanding invoices as collateral to secure quick funding
for short-term needs.

Summary

• Long-Term Sources: Used for funding major investments, expansions, or long-term

assets. Includes equity financing, long-term loans, bonds, and retained earnings.
• Short-Term Sources: Used for day-to-day operations or seasonal needs. Includes
overdrafts, trade credit, short-term loans, factoring, and commercial paper.

Overview of Institutional Finance: -

Institutional finance refers to financial support provided by formal financial institutions to

businesses and individuals. These institutions offer a variety of funding options, including
loans, equity investment, and other financial products.

Key Types of Institutional Finance:

1. Commercial Banks: Provide loans, overdrafts, and credit facilities to businesses for
day-to-day operations and medium-term needs.
2. Development Banks: Focus on long-term financing for projects that contribute to
economic development, such as infrastructure and industrial projects.
3. Investment Banks: Help businesses raise capital by issuing stocks or bonds and
provide advisory services for mergers and acquisitions.
4. Venture Capital Firms: Invest in high-risk startups in exchange for equity, offering
funding for innovative and high-growth businesses.
5. Private Equity Firms: Invest in established businesses, often taking control to
restructure and improve operations.
6. Insurance Companies: Provide long-term financing through investments in various
assets and also offer business loans.
 7. Mutual Funds: Pool money from investors to finance businesses by buying stocks or
bonds.
8. Non-Banking Financial Companies (NBFCs): Provide loans, hire purchase, leasing,
and other financial services, often in underserved markets.
9. Export Credit Agencies (ECAs): Support international trade by offering financing,
guarantees, or insurance for exports.

Advantages:

• Large Funding: Institutions can provide significant capital.

• Expert Advice: Offer strategic business guidance, especially venture capital and investment
banks.
• Lower Rates: Development banks may offer lower interest rates for long-term funding.

Challenges:

• Strict Criteria: Difficult eligibility requirements.

• Equity Dilution: Business owners may give up a portion of ownership (for venture capital).
• Complex Documentation: The process often involves extensive paperwork.

In short, institutional finance is vital for businesses seeking structured, large-scale, or long-
term funding.

Commercial Banks: Overview: -

Commercial banks are financial institutions that provide a wide range of banking services,
including accepting deposits, providing loans, and offering financial products to individuals,
businesses, and governments. They are profit-oriented institutions and form the backbone of
the financial system by facilitating the flow of money in the economy.

Key Types of Institutional Finance:

1. Commercial Banks: Provide loans, overdrafts, and credit facilities to businesses for
day-to-day operations and medium-term needs.
2. Development Banks: Focus on long-term financing for projects that contribute to
economic development, such as infrastructure and industrial projects.
3. Investment Banks: Help businesses raise capital by issuing stocks or bonds and
provide advisory services for mergers and acquisitions.
4. Venture Capital Firms: Invest in high-risk startups in exchange for equity, offering
funding for innovative and high-growth businesses.
5. Private Equity Firms: Invest in established businesses, often taking control to
restructure and improve operations.
6. Insurance Companies: Provide long-term financing through investments in various
assets and also offer business loans.
7. Mutual Funds: Pool money from investors to finance businesses by buying stocks or
bonds.
8. Non-Banking Financial Companies (NBFCs): Provide loans, hire purchase, leasing,
and other financial services, often in underserved markets.
9. Export Credit Agencies (ECAs): Support international trade by offering financing,
guarantees, or insurance for exports.
Advantages:

• Large Funding: Institutions can provide significant capital.

• Expert Advice: Offer strategic business guidance, especially venture capital and investment
banks.
• Lower Rates: Development banks may offer lower interest rates for long-term funding.

Challenges:

• Strict Criteria: Difficult eligibility requirements.

• Equity Dilution: Business owners may give up a portion of ownership (for venture capital).
• Complex Documentation: The process often involves extensive paperwork.

In short, institutional finance is vital for businesses seeking structured, large-scale, or long-
term funding.

SFCs (State Financial Corporations) in India: -

State Financial Corporations (SFCs) are government-established institutions in India that

provide financial assistance to small and medium-sized enterprises (SMEs) and businesses
for setting up or expanding their operations. They primarily focus on regional or state-level
businesses, especially in industries such as manufacturing, trade, and service.

Way of Financing by SFCs:

1. Term Loans: SFCs offer long-term loans to businesses for purchasing machinery, setting up
factories, and other capital expenditures.
2. Working Capital Loans: They provide short-term loans to meet daily operational expenses.
3. Syndicated Loans: In collaboration with other banks or financial institutions, SFCs offer
larger loans for bigger projects.
4. Equity Participation: Some SFCs provide equity financing or venture capital, offering shares
in exchange for financing.
5. Leasing and Hire Purchase: They offer financing for purchasing machinery or equipment on
a lease or hire-purchase basis.
6. Direct Loans for MSMEs: Focused on the micro, small, and medium enterprises (MSMEs),
they provide affordable credit and subsidies.

Key Differences in Financing for Small and Medium Businesses:

• SFCs generally focus on providing government-subsidized loans and financing tailored for
state-level development. They tend to offer long-term financing options at lower interest
rates, especially for MSMEs.

Summary:

• SFCs: Government-backed institutions offering affordable term loans, working capital, and
equity participation for small businesses, focusing on regional development.

SFCs play a crucial role in supporting the growth of small and medium-sized businesses
in India, offering different types of financial products tailored to their specific needs.

NBFCs (Non-Banking Financial Companies) in India: -

Non-Banking Financial Companies (NBFCs) are financial institutions that provide a range
of financial services similar to commercial banks, excluding banking services like accepting
deposits. NBFCs play a significant role in financing small and medium businesses, especially
in sectors underserved by traditional banks.

Way of Financing by NBFCs:

1. Loans and Advances: NBFCs offer both short-term and long-term loans for working capital,
business expansion, or asset purchase.
2. Microfinance: Many NBFCs focus on providing loans to smaller businesses or individuals in
rural areas who lack access to formal banking channels.
3. Leasing and Hire Purchase: NBFCs finance the purchase of machinery, vehicles, and
equipment through lease agreements or hire-purchase schemes.
4. Venture Capital: Some NBFCs focus on providing equity or venture capital to startups and
small businesses in exchange for a stake in the company.
5. Consumer Finance: NBFCs also provide loans for personal goods, home appliances, and
other consumer goods, benefiting businesses involved in these sectors.
6. Structured Finance: NBFCs offer specialized financial products, including asset-backed
financing and structured lending options.

Key Differences in Financing for Small and Medium Businesses:

• NBFCs, on the other hand, cater to businesses with flexible and innovative financial
products. They provide quick loans and have fewer regulatory restrictions, making them
more accessible for smaller businesses that may find it difficult to secure funding from
traditional banks.

Summary:

• NBFCs: Non-government financial institutions providing quick loans, microfinance, leasing,

and venture capital, catering to sectors and businesses that might be underserved by
commercial banks.

NBFCs play a crucial role in supporting the growth of small and medium-sized businesses in
India, offering different types of financial products tailored to their specific needs.

Entrepreneurship Development Programs in India: -

Entrepreneurship development programs (EDPs) in India are designed to promote

entrepreneurial skills, provide knowledge, and foster innovation and business development.
These programs are aimed at both aspiring entrepreneurs and existing business owners,
helping them to acquire the necessary skills, knowledge, and resources to start and sustain
successful businesses.

Several government bodies, financial institutions, and non-governmental organizations

(NGOs) offer such programs, often focusing on empowering youth, women, and
marginalized communities.

1. Entrepreneurship Development Institute of India (EDII): Provides training,

research, and education for aspiring entrepreneurs through programs like Post
Graduate Diploma and Startup India Learning Program.
 2. National Entrepreneurship Development Board (NEDB): Promotes
entrepreneurship through skill development programs and financial assistance for
MSMEs.
3. Startup India Scheme: Supports startups with funding, regulatory reforms, and
mentorship to promote innovation and growth.
4. Pradhan Mantri Employment Generation Programme (PMEGP): Provides
subsidized loans and training to set up small businesses, focusing on creating jobs in
rural and urban areas.
5. Atal Innovation Mission (AIM): Encourages innovation through Atal Tinkering
Labs and incubation centers for young entrepreneurs and startups.
6. MSME Skill Development Programs: Focuses on entrepreneurship training and
skill development for small businesses to enhance their capabilities.
7. NSIC Programs: Offers marketing support, financial assistance, and technology
upgrades to small industries and entrepreneurs.
8. Women Entrepreneurship Programs: Includes schemes like Stand Up India and
Mahila Coir Yojana, supporting women entrepreneurs with financial aid and
training.
9. Pradhan Mantri Mudra Yojana (PMMY): Provides easy loans to micro-
enterprises, along with training and mentoring to support business growth.

These programs aim to support entrepreneurship by providing financial assistance, training,

and mentorship to new and existing entrepreneurs across various sectors.

The Entrepreneurial Journey: -

The entrepreneurial journey is a process that involves several stages, from the initial idea to
running a successful business. Each stage requires different skills, resources, and mindset.
Here’s a brief overview of the key stages in the entrepreneurial journey

1. Ideation: The process begins with generating business ideas and identifying
opportunities or problems to solve.
2. Research and Planning: Entrepreneurs validate their ideas through market research
and create a business plan outlining goals, strategies, and funding needs.
3. Setting Up the Business: Involves registering the business, securing funding, and
setting up operations.
4. Product Development and Testing: Entrepreneurs design and test the product or
service based on customer feedback.
5. Marketing and Launch: A marketing strategy is created to launch the product and
build brand awareness.
6. Growth and Scaling: Focuses on expanding the business by increasing production,
hiring, and exploring new markets.
7. Managing Operations and Challenges: Day-to-day operations are managed, and
challenges are addressed to maintain profitability.
8. Maturity and Exit Strategy: As the business matures, the entrepreneur may consider
an exit strategy, like selling or scaling further.
9. Reflection and Learning: Entrepreneurs reflect on their journey, learn from
successes and failures, and continuously improve for future ventures.

The entrepreneurial journey involves several stages, from idea conception to scaling and
eventually reflecting on the experience to grow further.
Institutions in Aid of Entrepreneurship Development in India: -

Various institutions in India play a crucial role in fostering and supporting entrepreneurship
through training, funding, mentoring, and other forms of assistance. These institutions are
both government and private entities that help entrepreneurs start and grow their businesses.

1. Entrepreneurship Development Institute of India (EDII): Provides training and

education to aspiring entrepreneurs through various programs.
2. National Entrepreneurship and Small Business Development Institute
(NIESBUD): Promotes small business development through training and research.
3. NABARD: Supports rural entrepreneurship with financial aid and skill development
in agriculture and rural sectors.
4. Small Industries Development Bank of India (SIDBI): Offers financial assistance,
loans, and capacity-building programs for small and medium enterprises (SMEs).
5. Khadi and Village Industries Commission (KVIC): Promotes rural and traditional
industries, offering financial support and resources.
6. Atal Innovation Mission (AIM): Encourages innovation and entrepreneurship
through incubation centers and tinkering labs.
7. National Small Industries Corporation (NSIC): Supports SMEs with financing,
marketing, and technology solutions.
8. Women Entrepreneurship Development (WED): Empowers women entrepreneurs
with training, financial support, and specialized schemes.
9. Department of Science & Technology (DST): Promotes technology-based
entrepreneurship and provides funding and mentorship.
10. State Financial Corporations (SFCs): Offers state-level financial support, loans, and
equity participation for SMEs.
11. Pradhan Mantri Mudra Yojana (PMMY): Provides easy loans for micro-
enterprises through different categories based on business growth.
12. Industrial Training Institutes (ITIs): Offers skill development programs for self-
employment and technical entrepreneurship.

These institutions play a key role in supporting entrepreneurship by providing financial,

technical, and training resources.