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Lecture 11

This document discusses different sources of capital for financing a business venture. There are two main types of financing: debt financing which involves loans, and equity financing which provides ownership in exchange for investment. Internal sources of funding include profits, asset sales, and extended payment terms. External sources include personal funds, friends and family, commercial bank loans using collateral, private investors who take an equity stake, and bootstrap financing which conserves cash through alternative means instead of outside capital.

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10 views

Lecture 11

This document discusses different sources of capital for financing a business venture. There are two main types of financing: debt financing which involves loans, and equity financing which provides ownership in exchange for investment. Internal sources of funding include profits, asset sales, and extended payment terms. External sources include personal funds, friends and family, commercial bank loans using collateral, private investors who take an equity stake, and bootstrap financing which conserves cash through alternative means instead of outside capital.

Uploaded by

mohammadaliae71
Copyright
© © All Rights Reserved
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Chapter : 11

SOURCES OF CAPITAL
Debt or Equity Financing:

 There are two general types of financing available:


debt financing and equity financing.

 Debt financing is a financing method involving an interest-bearing


instrument, usually a loan, the payment of which is only indirectly related
to the sales and profits of the venture.
 Short-term debt
 Long-term debt
.
Debt or Equity Financing:

 Equity financing dose not require collateral and offers the investor some form
of owner-ship position in the venture.

 The investor shares in the profits of the venture, based on the percentage of
the business owned.

 Key factors favoring the use of one type of financing over another are the
availability of funds, the assets of the venture, and the prevailing interest
rates.
Internal or External Funds:

 Financing also can come from both internal and external funds.

 The funds most frequently employed are internally generated funds.


 Internally generated funds can come from several sources within the company:
profits, sale of assets, reduction in working capital, extended payment terms, and
accounts receivable.

 The other general source of funds is external to the venture.


 Alternative sources of external financing need to be evaluated on three bases: the
length of time of funds are available, the costs involved, and the amount of
company control lost.
Personal Funds:

 Few, if any, new ventures are stared without the personal funds of the
entrepreneur .

 Not only are these the least expensive funds in terms of cost and control,
but they are absolutely essential in attracting outside funding, particularly
from banks, private investors, and venture capitalists.
Family and Friends:

 After the entrepreneur, family and friends are the usual source of capital
for a new venture.

 They are most likely to invest due to their relationship with the
entrepreneur.

 This helps overcome one portion of uncertainty felt by impersonal


investors – they have knowledge of the entrepreneur.
Commercial Bank:

 Commercial banks are by far the source of short-term funds most


frequently used by the entrepreneur when collateral is available.

 The funds provided are in the form of debt financing and, as such,
require some tangible guaranty or collateral – some asset with value.
Commercial Bank:
 Asset Base for loans: Tangible collateral valued at more than the amount borrowed.
 Inventory loans: Inventory is another of the firm’s assets that can often be the basis
for a loan, particularly when the inventory is more liquid and can easily be sold.
 Equipment loans: Long-term financing, usually 3-10 year basis.
 Real Estate loans: Mortgage financing is usually easily obtained to finance a
company’s land, plant, or another building.
Bank Lending Decisions

 Five C’s of lending:


1. Character
2. Capacity
3. Capital
4. Collateral
5. Conditions
Private Financing:
 Another source of funds for the entrepreneur is private investors, also called
angels, who may be family and friends or wealthy individuals.

Types of Investors:
 An investor usually takes an equity position in the company, can influence the
nature and direction of the business to some extent, and may even be involved to
some degree in the business operation.
 The degree of involvement in the day-to-day operations of the venture is an
important point for the entrepreneur to consider in selecting an investor.
Bootstrap Financing:
 One alternative to obtaining the needed private capital that should be considered is
bootstrap financing.

 This approach is particularly important at start-up and in the early years of the venture.
Bootstrap Financing: A case against outside
capital
 Takes at least 6 months to arrange outside capital.
 Second, outside capital often decreases a firm’s drive for sales and profits.
 Third, the availability of capital increases the impulse to spend.
 Fourth, outside capital can decrease the company’s flexibility.
 Finally, outside capital may cause disruption and problems in the venture.
 Capital is not provided without the expectation of a return, sometimes before the business should
be giving one.
 Bootstrap financing involves using any possible method for conserving cash.

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