Finding Starting Capital

Avenues for Finding Starting Capital

In groups of five, determine how you can use bootstrapping approaches for your
business idea!
Discuss the pros and cons of each money source!

Bootstrapping options Pros Cons

1. Personal Savings 1. 1. You'll know exactly how

much money you have to run
1. Using your own funds to
your business, and you won't
fund your business could
have to waste time looking for
place a hardship on your
alternative sources of capital
family and personal life.
from investors or banks.
You might not have
enough money to cover
2. 2.When compared to alternative
your living expenses.
financing choices, self-funding
You should strive to set
your business allows you far
up a contingency reserve
more control. It also means you
in case you require more
won't have to repay or rely on
funds to get you through
outside investors or lenders,
a challenging phase.
who may choose to stop
supporting you at any time.
2. You may lose your home
and other personal
3.You will retain full belongings if your
ownership of the business, business fails.
which in turn means that you
will receive 100 per cent of 3. Many investors and
future profits. venture capitalists can
4. When you fund your own also give mentoring and
business, you'll be forced to live networking chances for
within your means, only you and your company; if
investing in business equipment you fund your company
and marketing when it's really on your own, you'll have
necessary. This might assist to build your own
you in prioritizing your business relationships and
expenses and avoiding mentoring possibilities.
overspending.

Action Working Sheet 06 – Finding Starting Capital -1-

Bicol University & Leuphana University │STEP – Student Training for Entrepreneurial Promotion
2.Bank Loans 1. You could have trouble
making monthly
repayments if your
1. While you must pay interest customers don't pay
on your bank loan, you are you promptly,
not required to provide the causing cashflow
lender a percentage of your problems.
profits or a stock in your
business.
2. There may be a charge
2. Interest rates may be fixed if you want to repay the
for the period, so you'll know loan before the end of
how much you'll have to pay the loan term,
back during the loan's life. particularly if the
interest rate on the loan
3. There may be an is fixed.
arrangement fee that is paid 3. Larger loans will have
at the start of the loan but certain terms and
not throughout its life. If it is conditions or covenants
an on-demand loan, an that you must adhere
annual renewal fee may be to, such as the
payable. provision of quarterly
management
4. The loan is not repayable on information.
demand and so available for 4. Loans are not very
the term of the loan - flexible - you could be
generally three to ten years - paying interest on funds
unless you breach the loan you're not using.
conditions.

3. Venture Capitalist 1. Opportunity for Expansion 1. A VC may decide to redeem

the investment within 3 to 5
of the Company. Venture
years. Their primary focus is
Capital provides the to earn capital gains.
company with an Venture capital may not be
opportunity to expand,  in suitable for an entrepreneur
whose business plan will
venture capital, the
take a longer time to provide
investors themselves are liquidity.
ready to take the risk as
2. Some VC’s require high ROI

Action Working Sheet 06 – Finding Starting Capital -2-

Bicol University & Leuphana University │STEP – Student Training for Entrepreneurial Promotion
 they believe in the
company’s long-term
success. Therefore,
venture capital financing
is beneficial for start-ups
with high initial cost and
limited operating history.
2. Helpful in building
networks and
connections. Venture
capitalists have a huge
network of connections in
the business community.
These connections could
be advantageous for the
start-ups to grow and
become successful. They
can help the start-up to
enter into alliances with
potential customers or
business houses.
3. There is no obligation to
repay the venture
capitalist investors if the
start-up fails or shuts
down. Hence, venture
funding is essential for
start-ups. It does not
leave the start-up with the
burden to pay back as is
the case with bank loans
4. Besides capital financing,
venture capital is also a
source of valuable
guidance, expertise, and
consultation.  They can
help with building
Action Working Sheet 06 – Finding Starting Capital
Bicol University & Leuphana University │STEP – Student Training for Entrepreneurial Promotion
within the next three to five
years of investment. If your
start-up will need more time
to generate high ROI, then
opting for VC may not be the
right choice. As expectation
of higher ROI may cause a
high level of stress.
3. Venture Capitalists are in a
hurry to sell off their equity
stake. Therefore, they may
pressurize the owner of the
company to list the company.
This untimely listing of the
company could result in
under-valuation of the
company’s shares. This
could prove to be a
disadvantage for the
company’s owner.
4. Because venture funding
involves a huge amount of
capital, the VC may not
release all the funds at the
same time. Most of the
contracts require the start-up
company to reach certain
milestones in order to
receive the funding, which
they originally requested.
This creates undue pressure
on the start-up company.
-3-
 strategies, technical
assistance, resources,
etc. in order to make a
business successful.

4.Financing from Friends 1. Will be flexible. On a

and Family practical level, they may offer
loans without security or
accept less security than 1.  Any misunderstandings
banks. about the arrangement
can damage
relationships.
2. May lend
funds interest-free or at a low 2. There is a risk your
rate. investors may offer more
3. May agree to a longer than they can afford to
repayment period or lower lose, or that they will
return on their investment than demand their money
formal lenders. They may also back when it suits them
seek a lower rate of initial but not your business.
return than commercial
backers.
3. They may also want to
get more involved in the
business, which may not
be appropriate.
4. Already know your
character and circumstances
4. They may also want to
and so are less likely to need
put more interest in the
a detailed business plan.
borrowed money if they
see that your business
is successfully earning a
lot of money.

Net Present Value (NPV)

Period Cash Cash inflows Net Cash Present Present

outflows Flow Value rate at Value
21%

Action Working Sheet 06 – Finding Starting Capital -4-

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 0

In your groups of five determine if your decision would change if:

• The risk premium changed to 15% and 25%
• You re-evaluated and found out that initial outlay for the investment was USD
2,000,000 or USD 850,000 at the current discount rate.
• The cash inflows rose to USD 500, 000 but were then subject to a 2% tax and the initial
outlay and rate of return were not altered.

Return on Investment (ROI)

Compare these two investments

• A: A USD 1,000,000 investment that earns USD 50,000 in interest.  B: A USD 200,000
investment that earns USD 15,000 in interest.

Which one generates more investment?

Which one earns a higher return on investment?

Action Working Sheet 06 – Finding Starting Capital -5-

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Which is the best investment option?

Year 1 Year 2 Year 3 Year 4

Cashout
Lay

Return in
USD

ROI

Investment Plan
Now it’s coming to figures. Before you start your business you should have a clear picture of the money
issues because money and profit is essential for the success of your business. First provide an
estimation of the investments you have to make to set-up your business. The items listed below are only
examples. Not all the items may be applicable to your business and there may be other items applicable
to your business.

Start-Up Investments
Amount (Php)

Assets

Action Working Sheet 06 – Finding Starting Capital -6-

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 Furniture & Fittings Php 250,000

Computer Packages Php 300,000

Van Php 600,000

Land & Buildings Php 3.5 million

Mobile phone Php 50,000

Tools\Equipment Php 500,000

Set-up fees

Deposit & First rent Php 500,000

Legal fees & Tax Php 50,000

Licenses Php 20,000

Telephone line Php 3,000

Preliminary expenses

Insurance Php 55,000

Advertising Php 50,000

Printing & Stationary Php 50,000

Working capital Php 250,000

TOTAL Php 5.1 Million

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Bicol University & Leuphana University │STEP – Student Training for Entrepreneurial Promotion
 Starting Capital Plan
This is the second part of your finance plan. Review the capital you need for setting-up your business
(Action Working Sheet 11 – Investment Plan). Now, provide an overview of the sources of the capital to
finance your start-up investments.

Sources of Capital
Review Action Working Sheet 11 – Investment Plan: Determine the amount of money you will need for
your business!
List the different sources and obligation in respect to the above amount.

Action Working Sheet 06 – Finding Starting Capital -8-

Bicol University & Leuphana University │STEP – Student Training for Entrepreneurial Promotion
 Amount (Php)
Source
Business owner(s) investments
Loans and money borrowed:

Venture Capitalist Php 2.5 Million

Bank Loans Php 3 Million
Personal Savings Php 500,000
TOTAL (Loans and money borrowed) Php 5.5Million

TOTAL Php 5.5Million

In case one of your sources disappoints you, where else will you get the money and how much will it be?
Alternative Sources Amount (Php)
Friends and Family Php 2
Million

Action Working Sheet 06 – Finding Starting Capital -9-

Bicol University & Leuphana University │STEP – Student Training for Entrepreneurial Promotion