BU-EDP-Module-7

Module-7:’FINANCING THE NEW VENTURE’

Sources of capital: -

Generally raising money to launch an enterprise has been challenge and very difficult
for the entrepreneurs.
Generally every entrepreneur gets money or raise money from the following ways....
 Banks
 Financial institutions
 Equity share capital
 IPO
 Loans
 Debentures
Even though entrepreneur has number of ways for getting finance but choosing the
best is again challenge and he should approach the a financial adviser
Every entrepreneur has to identify his future commitments and then estimate the
finance
He must maintain a good network with his creditors, investors, lenders, customers
and etc
An entrepreneur should have basic knowledge on all goods, services, and all
activities
Finally every entrepreneur should follow business plan for survival of him and his
company

EQUITY FINANCING (or) EQUITY SHARE CAPITAL

 Equity share represents the ownership position in a company

 The holders of these shares are called equity share holders
 They are legal owners of the company
 Their capital is permanent and has no maturity date
 They will get dividend/return/benefit
 Their dividend in return is not fixed; hence it is called ‘variable income security’

Features of equity shares

1. Right to income:-
Every equity share holder has Right to income
They had claim on residual income on company
Residual income refers after paying :-----
 Taxes
 Expenses
 Interest charges
 Preference dividend
2. Claim on assets:-
 Every equity share holders has paid last after claim of debt holders and preference
share holders paid
 They don’t have any right on company assets

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3. Right to control:-
 They have legal power to choosing/appointing the board of directors
 They have power to replace the board of director
4. Voting rights:-
 Every equity share holder has right to vote for electing board of directors
 Every equity share holder can participate in the vital affair of election of board of
directors
5. Limited liability:-
 Every equity share holders has limited liability with the company because once he
paid investment back then no liability.

Advantages of equity capital(for company)

No compulsion to pay dividend for equity share holders

Permanent capital (no maturity date)
Cushion to lenders (easily borrowing capital)
Tax exemption (dividends are free from tax)

Dis -Advantages of equity capital(for company)

1. Cost: - company has to pay high dividend to share holders

2. Risk: - From Investors Company get problem for not paid dividend at the time
of windup of company
3. Earnings dilution: - Dilutes the existing share holders after issuing new shares
which reduces EPS value
4. Product ownership dilution:-Purchasing the new shares from new share
holders makes that product dilutes and reduces the EPS of that product.

DEBT - FINANCING

Debt:-

Debt means borrowing money from outside source under predetermined terms and
conditions
Debt is a good option to raise money to grow your business without given up?
Every company it may be small or big or medium it requires surplus finance for
expansion of company activities
But some large scale companies prefer equities than debts

PROS OF DEBT FINANCING OPTION

Autonomy: - every company has Personal independence for raising finance with minimum
terms and conditions

Tax benefits: - interest payments on loans are deducted from the company’s income before
calculation tax

Discipline: - generally investors think managers in the company is working hard for them but
actually managers are working for achieving profits

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CONS OF DEBT FINANCING OPTION

Repayment (sometimes it’s difficult to repay at the time of bankruptcy)

Interest rates (some times high interest rates)
Collaterals and guarantees (submission of ownership documents for loan, debts)

TYPES OF DEBT FINANCING

Working capital loan:-

This is short term loan for raising finance

This is mainly raised for

Purchase of Raw materials

Payment of wages
Administrative expenses
Financing inventories
Managing internal cash flows
Supporting supply chains
Funding production
Marketing operations

Overdraft:-

This is also one type of short term debt option

Company have a current account for this facility
Bank gives certain limit of money for overdrew

Factoring:-

 The bank buys the customer’s account receivables

 The operation of trade is done at domestic and international
 The entire responsibility took over the bank
 Company will rotate the entire money

Commercial papers(CP):-

 It is short term money market debt

 Issued by the companies
 Issued at a discount on face value (actual value of bond)
 They are purchased by banks, indusial, and mutual funds

Term loans:-

Loan particularly taken for particular period of time

They are mainly taken for buying companies assets and grow business

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Syndicated loans:-

They are large loans

They are raised by big corporations
Issued by the group of banks
Their aim to acquire domestic and international companies

Project finance:-

They are raised in large

They are used for long term infrastructure projects
Requires huge amounts
Raised in the form of tenders
They are very sensitive and including of formalities

Debentures:-

They are long debt instrument

Issued by the company by acknowledgement
It will be repay in future at pre determined interest rate

Inter-corporate deposits:-

This is fund issued by one surplus corporate

And it is received by one more corporate need of funds
This type of funds are very securitized

Personal loans:-

Issued by the banks, financial institutions

Received by entrepreneurs
For the purpose of any type of business
The business may be big or small banks approves
Issued with full of security only

Internal Funds (or) External Funds:-

Any new business can be financed by internal or external funds

Internal Funds:- the funds which are generated by the all ready existing business or profits
or benefits of any company are known as internal funds and example is-----

Retained earnings:-

Generated inside the company

They generated through trading/business
They are not distributed as dividends
They are holding for future expansion
Contribution from equity share holders in some cases

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Advantages of retained earnings:-

ΠReadily availability
ΠCheaper than external equity
ΠNo ownership dilution (no partnership with share holders)
ΠPositive connotation (An idea that is implied or suggested)

Dis-Advantages of retained earnings:-

㒆 Limited finance
㒆 High opportunity cost (sacrifice done by share holders)
㒆 Sale of assets (for emergency)
㒆 Cash

External Funds:-

The Funds which are generated by the external sources are known as external funds, they
are as follows:-

 Equity shares
 Preference shares
 Debentures
 Loans
 Options
 Bonds

Funding from Banks and financial institutions:-

Bank: - Bank is financial institution that accepts deposits and channels the money into
lending activities

Functions:-

 Generates loans
 Accepts deposits
 Accepts overdrafts
 Issues loan with high safe guard and high security

Financial institutions:-

 Finance is a blood for any business

 It generates every activity inherited in the business
 Finance is mandatory for any type of business like it may be small, medium, and
large
 Every entrepreneur needs money to start business
 It is very important to run an enterprise

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Some financial institutions:-

 SIDBI (Small industries development bank of India )

 Commercial banks
 Regional rural banks
 Co-operative banks
 NABARD (national bank for agriculture and rural development)

Schemes and types of loans for ENTREPRENEURS

 Traders easy loan scheme

 SSI loans
 Business current accounts
 Open term loan
 Retail trade
 Doctor plus
 SME credit plus
 Small business credit card
 Auto clean
 Charter for SSI
 Artisan credit card
 School plus
 Flexi loan

Entrepreneur scheme:- (by SBI Bank)

 Term loans
 Working capital
 Equity fund finance
 Stree Shakti package (For Women Entrepreneurs-50% of applied)

Banks offered loans for entrepreneurs:-

 SBI
 HSBC
 ICICI
 Bank of Baroda
 Oriental Bank of Commerce& some of the other banks

Private placement:-

㒆 Some of the private agencies they are willing to give loans for entrepreneurs with
their frame rule, terms, and conditions and mutual agreements along with high
security and high interest rates.
㒆 Regulation D (Rules 505 & 506)
㒆 This memorandum describes legal registration for private placement of for selling
stocks in common manner like IPO’s

Generally their loans are as follows:-

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♫ High expensive in interest

♫ Limited time period
♫ Lack of disclosures
♫ More terms and conditions

Types of investors:-

Equity share holders

Debt holders
Preference share holders
General public

Private offerings:-

※ This is offering from private companies

※ Under the regulation D (504)
※ Deals with-Small Company Offering Registration (SCOR)
※ Also known as ‘Uniform Limited Offering Registration’
※ Created and framed in 1980 in US
※ Created for small companies for selling their stock to public
※ No need to submit or register or satisfying the SEBI guidelines

Boot strap Financing:-

 Boot strap financing is defined as building a business out of little of nothing with no
or minimum outside capital.
 Boot strap finance is generated from friends, relatives, and private funds

Advantages:-

 In-expensive
 High returns
 No interest
 High worth

Dis-Advantages:-

 This type of financing is unnecessary for entrepreneur

 It is not enough funds for business
 Risk is inherited in this type of finance with relationships

Sources of bootstrap financing:-

 Trade credit (30, 60, 90days from lenders)

 Factoring (selling accounts receivables to buyer)
 Real estate (leasing of any asset)
 Equipment suppliers (equipment loan from manufactures)

Venture Capital:-
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Definition:-venture capital is thought of as, “The early stage financing of new and young
enterprises seeking to grow rapidly”

(OR)

 Venture capital is also described as un-secured risk financing.

 Venture capital represents financial investment in a highly risky proposition made in
the hope of earning a high rate of return.

The first stage of investment (not considering future)

Features of venture capital:-

Ω Invested in high technology or innovative goods/services

Ω High risky investment
Ω Chances of failures
Ω Returns of venture capital are much liquidated
Ω They are long term investments
Ω Venture capital firm (VCF) encourages nature
Ω VCF helps newly upcoming entrepreneurs

Stages of venture financing:-

Early Stage- Venture Financing Later Stage -venture Financing

 Seed capital stage  Expansion finance

 Start up stage  Replacement finance
 First round finance  Turn around
Second
Seedcapital round finance
stage Invested Small amount- to prove Bridge finance
 concept
Start up stage Buy outs
Initial product development &marketing
 Buy in
First round finance Ready to manufacture a product
Second round finance Working capital required for manufacturing
Expansion finance Funds required for expansion
Replacement finance Untagged high interest funds/services-replace with best
sources-positive cash flows
Turn around Breakeven point of profits and sales
Bridge finance Bridge between public and venture investors
Buy outs Take over ownership of; of corporations and companies
Buy in Stock up on to keep for future use or sale

Sources of venture capital:-

 EXIM Bank

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 IDBI Venture Fund

 ICICI Venture Funds Management Company Limited
 IFCI Venture Capital Funds Limited
 GVFL (Gujarat Venture Finance Limited)
 SIDBI Venture Fund
 UTI Venture Funds Management Company
 Canara Bank Venture Capital Fund
 PIVF (Punjab InfoTech Venture Fund)

Foreign Direct Investement(FDI):-

Definition: - FDI is investment of foreign assets into domestic structures, equipment, and
organizations

Features:-

ñ Foreign country is directly investing in India

ñ Not invested in stock market
ñ It is very hot investment for India
ñ It is life blood for economic development
ñ Mainly issued for small, big manufacturing industries
ñ Increases countries trade balance
ñ Increases labour standards & skills
ñ Transportation of new technology
ñ Importing of new innovative ideas
ñ Improves infrastructure
ñ Improves general business climate

FDI Key sectors:-

 Hotel & tourism

 Private sector banking
 Insurance sector
 Telecommunication
 Trading (exports/logistics)
 Power
 Drugs & pharmaceuticals
 Roads, highways, ports & harbours
 Pollution control and Management
 Call centres in India
 BPO’s

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