Lecture 8

Sources of Capital
Md. Mohsinur Rahman
[email protected]
+8801713120932 (WhatsApp)
 Outline of lecture-8

Other sources of
Sources of financing:
Financing: Debt or
Financing: Internal Government &
Equity
or External Private Sector
Initiatives
 Debt Financing
• Financing method involving an interest-bearing instrument
• Usually a loan, payment of which is indirectly related to the sales and profit
• Also known as asset based financing (not always true for Bangladesh)
• Requires assets (car, house, inventory, plant, machinery, land) to be used as
collateral
• Returned Amount = Principal Amount + fees (Islamic Financing) / Interest
(Conventional Financing)
• Short term (for less than a year) financing is used for WC (working capital) to
finance inventory, day to day operations, account receivables (A/R)
• Long term (for more than a year) financing is used to purchase fixed assets (land,
machinery – usually 50 to 80 percent of asset value), which also act as collateral
 Debt Financing (cont…)

• Is always cheaper
• Let entrepreneur keep
Debt ownership and control
• Need to be cautious on
the size as has to repay Leveraging

Leads to
 Equity Financing

• May be individual or institution

• No collateral is required
• Expensive as ownership via share is
transferred to financier
• Investor share the profit and loss
proportionate to share
• Entrepreneur may lost control over
business if investor intervenes in
decision making
• Creates basis of debt financing
Debt Vs Equity Financing: Which one is preferred?

Preference depends on:

1. Availability of funds
2. Availability of asset as
collateral

Combination of both or
Hybrid model sometimes is
preferred and sustainable
 Internal sources of financing
• Within company sources are:
- Profit
- Sale of assets
- Reduction of WC (working capital)
- Extended payment terms
- Reduction of A/R (account receivables)

• Can be achieved:
- By reducing short term assets – inventory, cash, WC
- By outsourcing of some operations
- By renting assets rather than to purchase. Buy-back options are preferable
- By getting favorable payment terms from supplier
- By putting more effort on collections of A/R
 External Sources of Financing
Alternatives sources of external
financing needed to be evaluated
on below 3 criteria:
1. The time length for which the
fund is available
2. The cost involved
3. The amount of control lost
External Sources of Financing: Self / Personal Fund

• Referred to as ‘Blood Equity’

• Sources are savings, life
insurance, mortgage on fixed
assets
• Least expensive
• Important to gain confidence
and comfort of investors,
banks, VCs as it reflect
entrepreneur’s commitment
(in % term)
 External Sources of Financing: F&F
• Most likely to invest in start-up due to their relationship with
entrepreneur
• Provides small amount of equity funding
• Relatively easy to get
• More patient than professional investors in terms of getting return
• Only flip side – may want to get involved in business operation
• Should treat as other investments and need to present the
positives and negatives of the business idea to F&Fs
• If in the form of loan all conditions should be spelled out
beforehand
• Should consider the relationship aspect in long run to avoid
unintended scenario
 External Sources of Financing: Commercial Banks
• Provides both long term and short term debt financing
A) Asset Backed Financing
i) Account Receivable Loans / Factoring: Short term financing,
80% LTV (Loan to Value)
*Factoring Vs Not Factoring (less costly for banks)

ii) Inventory Loans: Short term financing, 50% LTV if inventory

is liquid e.g.; LATR (Loan against trust receipt)
* Bank advances a large portion of inventory and is paid back on a pro rata basis
when inventory is sold
iii) Equipment Loans: Longer term, 50-80% LTV (loan to
value),
Lease with buy back option (Islamic Financing)
iv) Real Estate Loans: Longer term, also known as
mortgage financing, 75% LTV
 External Sources of Financing: Commercial Banks

B) Cash Flow Financing:

i) Lines of Credit: In Bangladesh know as CC (Cash
Credit) or OD (Over Draft).
ii) Installment Loans: Monthly, quarterly, half yearly,
single installment
iii) Straight Commercial Loans: for seasonal financing
iv) Long Term Loans: for strong, matured companies
v) Character Loans: Unsecured / without any
collateral
External Sources of Financing: Why entrepreneurs take loans?
External Sources of Financing: Why Commercial Banks give loans?
External Sources of Financing: Why Commercial Banks give loans?

Fund Diversification

Utilization for declared

business purpose
 External Sources of Financing: Bank Selection by Entrepreneur

Criteria by Entrepreneur to Select Bank for Financing / Bank Shopping

Procedure:
• Prior positive financing experience in particular business area
• Favorable terms and conditions
• Able to provide amount required
External Sources of Financing: Commercial Banks Lending Decision Process

Bank
Entrepreneur
Selection

Assessment Proposal / Loan Application Form

by Credit Submission containing Mini Business Plan

Loan Repayment by Entrepreneur /

Disbursement Collection Effort By Bank
External Sources of Financing: Commercial Banks Lending Decision Process

Asses Credit Risk on Credit Worthiness

 External Sources of Financing: Potential Cost

• Time: It takes time to avail any outside / external fund.

• Lose of focus on business: Putting much effort on getting outside fund
may cause less focus and drive on sales and profit causing to miss
targeted profitability.
• Increased non-mandatory expenditure: Availability of fund may cause
spending in area where entrepreneur may wait.
• Loss of flexibility: Due to different condition by bank/investor,
entrepreneur may loose decision and operational flexibility.
• Lack of long term strategic view: To repay in short term, may loose
focus on long term outlook of sustainability. Most Bangladeshi start-
ups cannot avoid this.
 Bootstrap Financing
• Involves using any possible method for conserving cash:
1. Supplier discount
2. Deferred payment
3. Bulk packaging
4. Using co-op advertising with channels members
5. Consignment financing: It means purchasing at bulk but taking
delivery as and when required and pay only for the consumed
amount of merchandise
6. Outsourcing
 Government Initiative and Private Sector Engagement
Startup Bangladesh
‘Startup Bangladesh Limited’ is the flagship venture capital fund of ICT Division - the first and only
venture capital fund sponsored by the Government of the Peoples Republic of Bangladesh started its
journey on March 2020 with an allocated capital of BDT 500 crores. This effort will enable the nation
to innovate faster, create new jobs, develop technical skills, and realize the vision of Digital
Bangladesh.
Purpose of Startup Bangladesh
Startup Bangladesh Limited is committed to developing Bangladesh’s venture capital ecosystem by
providing support to early-stage tech based companies in the form of:
1. Capital,
2. Financial and operational guidance
3. The company also intends to provide superior returns over a medium to long term by investing in
high growth and social impact companies, with good management and corporate governance
through equality and equity linked instruments
 Government Initiative and Private Sector Engagement
Ares of Interest for Startup Bangladesh
• Support Technology-Based Innovation
• Create New Employment Opportunities
• Develop Technical Skills
• Promote Under-Represented Tech Groups
• Connect With Non-Resident Bangladeshis
• Foster an entrepreneurship culture
• Attract foreign investment and expertise
 Government Initiative and Private Sector Engagement
What are the investment types:
They provide investment in the form of:
1. Equity
2. Convertible debt
3. And/or Grants in seed and growth stage startups.
4. They invest through co-investments, as a fund-of-funds, and asset manager and provide other in-
kind support to startups and stakeholders.
 Private Sector Engagement
 Different accelerator programs, e.g.; GP Accelerator
 Different incubation programs, e.g.; Banglalink IT Incubator, ROBI R-Ventures, Startup Dhaka
Incubators

Bilateral/Multilateral Donor Organizations:

International Finance Corporation (IFC-The World Bank Group) have launched SEAF. Small
Enterprise Assistance Funds (SEAF), in partnership with the International Finance Corporation (IFC),
launched a new finance company to invest in small and medium enterprises (SME) in Bangladesh.
SEAF Bangladesh Ventures LLC (SEAF BV) will provide SMEs in Bangladesh with structured
capital of less than USD 500,000 per investment. This is the first finance company to focus
exclusively on providing growth and working capital to promising companies of this size in
Bangladesh.
SEAF Bangladesh Ventures - SEAF
 Development Sector Engagement
Bilateral/Multilateral Donor Organizations:
International Finance Corporation (IFC-The World Bank Group) have launched SEAF. Small
Enterprise Assistance Funds (SEAF), in partnership with the International Finance Corporation (IFC),
launched a new finance company to invest in small and medium enterprises (SME) in Bangladesh.
SEAF Bangladesh Ventures LLC (SEAF BV) will provide SMEs in Bangladesh with structured
capital of less than USD 500,000 per investment. This is the first finance company to focus
exclusively on providing growth and working capital to promising companies of this size in
Bangladesh.
SEAF Bangladesh Ventures - SEAF
 Private Sector Engagement
UNCDF offers catalytic grant financing for facilitating convenient access to finance for
entrepreneurs.
Challenge Fund Facility - UN Capital Development Fund (UNCDF)

Private Foundations:
The Edward M. Kennedy Center is now accepting applications for the Edward M. Kennedy (EMK)
Small Grant 2022. This grant is awarded to individuals or organizations that address socio-economic
issues to their core and offer innovative solutions. The theme for the applications is “Revival of
Communities after the Pandemic”.
 Thank You
See you in next class