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Final 4 - Sources of Capital

The document discusses various sources of finance for entrepreneurial ventures, including debt financing through loans, equity financing through investment, and internal sources like profits and asset sales. It also covers external sources such as funding from family and friends, bank loans, research and development partnerships, private investors, and more. The key factors discussed are the costs, control, and terms associated with different financing options.

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nusrat islam
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296 views15 pages

Final 4 - Sources of Capital

The document discusses various sources of finance for entrepreneurial ventures, including debt financing through loans, equity financing through investment, and internal sources like profits and asset sales. It also covers external sources such as funding from family and friends, bank loans, research and development partnerships, private investors, and more. The key factors discussed are the costs, control, and terms associated with different financing options.

Uploaded by

nusrat islam
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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MGT 368

Entrepreneurship
Final 4: Sources of Finance

- MD Asif Hossain 
Debt or Equity
Financing
• Debt financing - Obtaining
borrowed funds for the company.
• Asset-based financing;
requires some asset to be used as
a collateral.
• Borrowed funds plus interest
need to be paid back.
• Equity financing - Obtaining funds
for the company in exchange for
ownership.
• Does not require collateral.
• Offers investor some form of
ownership position.
11-2
Debt or Equity Financing (cont.)

 Factors affecting type of financing:


 Availability of funds.
 Assets of the venture.
 Prevailing interest rates.
 Financing requires some level of equity; amount
will vary by nature and size of venture.

11-3
Internal or
External Funds
• Internally generated funds are most
frequently employed; sources include:
• Profits.
• Sale of assets and little-used
assets.
• Working capital reduction.
• Accounts receivable.
• Short-term internal source of
funds:
• Reducing short-term assets -
inventory, cash, and other working-
capital items. 

11-4
Internal or External Funds (cont.)

 Criteria for evaluating external


sources of funds:
 Length of time the funds are available.
 Costs involved.
 Amount of company control lost.

11-5
Personal Funds

• Least expensive funds in terms of cost


and control.
• Essential in attracting outside funding.
• Typical sources of personal funds:
• Savings.
• Life insurance.
• Mortgage on a house or car.
• The entrepreneur’s level of commitment
is reflected in the percentage of total
assets that the entrepreneur has
committed.

11-6
• Likely to invest due to relationship
with entrepreneur. 
• Advantages - Easy to obtain
money; more patient than other
investors.  

Family and
• Disadvantage - Direct input into
operations of venture.
• A formal agreement must include:
Friends • Amount of money involved.
• Terms of the money.
• Rights and responsibilities of the
investor.
• Steps to be taken incase business
fails.

11-7
Commercial
Banks
• Types of Bank Loans (Asset
based)
• Accounts receivable loans.
• Inventory loans.
• Equipment loans.
• Real-estate loans.
• Cash flow financing (Conventional
bank loans)
• Installment loans.
• Straight commercial loans.
• Long-term loans.

11-8
Commercial Banks (cont.)

 Bank Lending Decisions


 Based on quantifiable information and subjective
judgments.
 Decisions are made according to the five Cs of
lending- Character, Capacity, Capital,
Collateral, and Conditions.
 Review of past financial statements and
future projections.
 Questions are asked regarding ability to repay
the loan.

11-9
Commercial Banks (cont.)

 “Bank Shopping” procedure:


 Complete an application, which is a “mini”
business plan.
 Evaluate alternative banks.
 Select one with a positive loan experience in the
business area.
 Set an appointment.
 Carefully present the case for the loan.
 Borrow the maximum amount possible.

11-10
Research and
Development
Limited Partnerships
• Money given to a firm for
developing a technology that
involves a tax shelter.
• Major elements:
• Contract - Liability for loss incurred
is borne by the limited partners; tax
advantages to both parties.
• Limited partnership - A party that
usually supplies money and has a
few responsibilities.
• Sponsoring company- Acts as the
general partner; has the base
technology but needs funds to
develop it.

11-11
Research and Development
Limited Partnerships (cont.)
 Procedure
 Funding stage - Establishment of contract;
investment of money; documentation of terms and
conditions, and scope of research.
 Development stage - Sponsoring company
performs actual research.
 Exit stage - Commences when technology is
successfully developed; sponsoring company and
the limited partners commercially reap the benefits
through either equity partnerships, royalty
partnerships, or joint ventures.

11-12
Research and Development
Limited Partnerships (cont.)
 Benefits:
 Provides funds with minimum amount of equity
dilution.
 Reduces the risks involved.
 Strengthens sponsoring company’s financial
statements.
 Costs:
 Expending of time and money.
 Restrictions placed on technology can be
substantial.
 Exit from the partnership may be too complex.
11-13
Private Financing
(Angels/Investors)
• Types of Investors
• Investor can influence nature
and direction of the business
• May be involved in the business
operation
• Entrepreneur needs to consider
degree of involvement
• Private Offerings
• A formalized method for
obtaining funds from private
investors
• Faster and less costly

11-14
Further Reading

 Chapter 11- Entrepreneurship 10th


Edition, Robert D.Hisrich

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