UNIT-5 FINANCING ENTREPRENEURSHIP BUSINESS

FUNDS FOR ENTREPRENEURIAL BUSINESS

There are10 funding options for startups/ entrepreneurship business that will help you raise
capital for business. Some of these funding options are for Indian business, however, similar
alternatives are available in different countries.
1) Bootstrapping: Self-funding, also known as bootstrapping, is an effective way of startup
financing, especially when one is just starting a business. First-time entrepreneurs often have
trouble getting funding without first showing some traction and a plan for potential success. One
can invest from their own savings or can get family and friends to contribute. This will be easy to
raise due to less formalities/compliances, plus less costs of raising. In most situations, family
and friends are flexible with the interest rate.
2) Crowdfunding: Crowdfunding is like taking a loan, pre-order, contribution or investments
from more than one person at the same time.
In crowdfunding an entrepreneur will put up a detailed description of his business on a
crowdfunding platform (sites in internet ex- Kickstarter, Indiegogo, Gofundme). One has to
mention the goals of his business, plans for making a profit, how much funding he needs and for
what reasons, etc. and then consumers can read about the business and give money if they like
the idea. Those giving money will make online pledges with the promise of pre-buying the
product or giving a donation. Anyone can contribute money toward helping a business that they
really believe in.
The best thing about crowd funding is that it can also generate interest and hence helps in
marketing the product alongside financing.
Some of the popular crowdfunding sites in India are Indiegogo, Wishberry, Ketto, Fundlined
and Catapoolt. 
3) Angel Investment: Angel investors are individuals with surplus cash and a keen interest to
invest in upcoming startups. They also work in groups of networks to collectively screen the
proposals before investing. They can also offer mentoring or advice alongside capital.
Angel investors have helped to start up many prominent companies, including Google, Yahoo
and Alibaba. This alternative form of investing generally occurs in a company’s early stages of
growth, with investors expecting a upto 30% equity. They prefer to take more risks in investment
for higher returns.
Angel Investment as a funding option has its shortcomings too. Angel investors invest lesser
amounts than venture capitalists.
The popular Angel Investors in India – Indian Angel Network, Mumbai
Angels, Hyderabad Angels. 
4) Venture Capital: Venture capitals are professionally managed funds (Fund companies) who
invest in companies that have huge potential. They usually invest in a business against equity and
exit when there is an IPO (Initial Public Offer) or an acquisition. VCs provide expertise,
mentorship and acts as a litmus test of where the organisation is going, evaluating the business
from the sustainability and scalability point of view.
A venture capital investment may be appropriate for small businesses that are beyond the startup
phase and already generating revenues.
Some of the well-known Venture Capitalists in India are – Nexus Venture Partners, Helion
Ventures, Kalaari Capital, Accel Partners, Blume Ventures, Canaan, Sequoia Capital and
Bessemer Ventures.
5) Business Incubators & Accelerators:
Early stage businesses can consider Incubator and Accelerator programs as a funding option.
Found in almost every major city, these programs assist hundreds of startup businesses every
year.
Though used interchangeably, there are few fundamental differences between the two terms.
Incubators are like a parent to to a child, who nurture the business providing shelter tools and
training and network to a business. Accelerators so more or less the same thing, but an incubator
helps/assists/nurtures a business to walk, while accelerator helps to run/take a giant leap.
These programs normally run for 4-8 months and require time commitment from the business
owners. You will also be able to make good connections with mentors, investors and other
fellow startups using this platform.
In India, popular names are Amity Innovation Incubator, AngelPrime, CIIE, IAN Business
Incubator, Villgro, Startup Village and TLabs. 
6) Raise Funds By Winning Contests:
An increase in the number of contests has tremendously helped to maximize the opportunities for
fund raising. It encourages entrepreneurs with business ideas to set up their own businesses. In
such competitions, you either have to build a product or prepare a business plan.
Winning these competitions can also get you some media coverage.
Some of the popular startups contests in India are NASSCOM’s 10000 startups, Microsoft
BizSparks, Conquest, NextBigIdea Contest, and Lets Ignite. 
7) Raise Money Through Bank Loans:
Normally, banks is the first place that entrepreneurs go when thinking about funding. The bank
provides two kinds of financing for businesses. One is working capital loan, and other is funding.
Working Capital loan is the loan required to run one complete cycle of revenue generating
operations, and the limit is usually decided by hypothecating stocks and debtors. Funding from
bank would involve the usual process of sharing the business plan and the valuation details,
along with the project report, based on which the loan is sanctioned.
Almost every bank in India offers SME finance through various programs. For instance, leading
Indian banks – Bank of Baroda, HDFC, ICICI and Axis banks.
8) Microfinance Providers or NBFCs
Microfinance is basically access of financial services to those who would not have access to
conventional banking services. It is increasingly becoming popular for those whose requirements
are limited and credit ratings not favoured by bank.
Similarly, NBFCs are Non-Banking Financial Corporations are corporations that provide
Banking services without meeting legal requirement/definition of a bank. 
9) Government Programs for Startup Capital:
The Government of India has launched 10,000 Crore Startup Fund in Union budget 2014-15 to
improve startup ecosystem in India. In order to boost innovative product companies, Government
has launched ‘Bank Of Ideas and Innovations’ program.
Government backed ‘Pradhan Mantri Micro Units Development and Refinance Agency
Limited (MUDRA)‘ starts with an initial corpus of Rs.20,000 crore to extend benefits to around
10 lakhs SMEs. One is supposed to submit his/her business plan and once approved, the loan
gets sanctioned. You get a MUDRA Card, which is like a credit card, which you can use to
purchase raw materials, other expenses etc. Shishu, Kishor and Tarun are three categories of
loans available under the promising scheme. SIDBI – Small Industries Development Bank of
India also offer business loans to MSME sector. 
10) Quick Ways to Raise Money for Your Business
There are few more ways to raise funds for your business. However, these might not work for
everyone. Still, check them out if you need quick funds.
Product Pre-sale: Selling your products before they launch is an often-overlooked and highly
effective way to raise the money needed for financing your business. Its’ a great way to improve
cashflow and prepare yourself for the consumer demand.
Selling Assets: This might sound like a tough step to take but it can help you meet your short
term fund requirements. Once you overcome the crisis situation, you can again buy back the
assets.
Credit Cards: Business credit cards are among the most readily available ways to finance a
startup and can be a quick way to get instant money. If you are a new business and don’t have a
tons of expenses, you can use a credit card and keep paying the minimum payment. However,
keep in mind that the interest rates and costs on the cards can build very quickly, and carrying
that debt can be detrimental to a business owner’s credit.
TRADITIONAL SOURCES
Starting a business is an exciting opportunity but it can be daunting at the same time especially
when funding from an outside source is required. While there are a number of funding sources
available, the kind of business you have will determine the kind of funds you’re eligible for.
1) Bootstrapping ; 2) Banks ; 3) Venture Capitalists; 4) Angel Investors; 5) Government
Funding
LOAN SYNDICATION
Loan syndication is the process of involving a group of lenders in funding various portions of a
loan for a single borrower. Loan syndication most often occurs when a borrower requires an
amount too large for a single lender to provide or when the loan is outside the scope of a lender's
risk-exposure levels. Thus, multiple lenders form a syndicate to provide the borrower with the
requested capital.
The agreements between lending parties and loan recipient often need to be managed by a
corporate risk manager to reduce misunderstandings and to enforce contractual obligations. The
primary lender conducts most of this due diligence, but lax oversight can increase corporate
costs. Company legal counsel may also be engaged to enforce loan covenants and lender
obligations.
Loan syndication is often used in corporate financing. Firms seek corporate loans for a variety of
business reasons that include funding for mergers, acquisitions, buyouts, and other capital
expenditure projects. These types of capital projects often require large amounts of capital that
typically exceed a single lender's resource or underwriting capacity.
Loan syndication allows any one lender to provide a large loan while maintaining a more prudent
and manageable credit exposure because the associated risks are shared with other lenders. Each
lender's liability is limited to their respective share of the loan interest. Generally speaking, with
the exception of collateral requirements, most terms are uniform among lenders. Collateral
assignments are generally assigned to different assets of the borrower for each lender. Usually,
there is only one loan agreement for the entire syndicate.

CONSORTIUM FINANCING
Under consortium financing, the banks formally join, by way of an inter- se agreement, to meet
the credit needs of the borrowers, In case of project financing, the banks and term lending
institutions come together. As per Oct 1996 credit policy, RBI allowed the individual
consortium, to frame their own norms for consortium lending.
Compulsory consortium formation: Banks have to ensure that their exposure does not exceed
the prudent credit exposure ceiling (max 15 % of their capital fund for individual borrowers and
40 % for group borrowers).
No. of banks and new banks-  There is no ceiling on the no. of banks to participate. Without the
consent of the existing consortium members, no bank can extend any credit facility.
Disposal of loan application- 60 days ( 45 for export) for fresh loans or enhancements, 45 days
(30) for renewal and 30 days (15) for ad hoc facilities. Where the participating banks are unable
to adhere to the time frame, borrowers are free to bring in new banks.
Appraisal- The lead banks is responsible for preparation of appraisal note, its circulation,
arrangement for convening meeting etc. It receives fee from the borrower for this.
Documentation- The documents are obtained under the Single Window Scheme, i.e. for all
banks, one set of documents is obtained.
Asset classification- Each bank is to classify the loan account, according to conduct of accounts
with the bank concerned, irrespective of the classification with other banks.
Post sanction follow –up : Regular meeting of consortium members is a normal requirement
where the banks share information about conduct of account & performance of the borrowing
unit.
Interest Rate– Since Jan 1995, the banks can fix their own rates.
Charge on securities: The banks have pari-passu(equably) charge over the securities which
means they share the charge in the ratio of their exposure approved by the consortium through a
formal agreement.
ROLE PLAYED BY COMMERCIAL BANKS
1. Statutory Roles: These consist in the main the functions for which banks were created in the
first place. Such roles are for example accepting of deposit and safekeeping of same, transfer of
money, giving of loans and advances, etc. By accepting deposit of customers especially
entrepreneur-customers, the banks will be providing security for customers’ money and giving
them opportunity to use their deposit to borrow more money from the banks to finance the
running of their enterprises. By funds transfer, money is moved from one account to another and
from one place to another. A good payment system which provides speedy fund transfers is vital
for the efficient working of an economy. And with the development of information technology in
banks, the speed of service delivery has improved while the cost of doing business has reduced
tremendously. The services have enabled entrepreneurs to make transactions outside their
immediate environment without necessarily having to carry money about.
2. Financing Roles: The primary reason that banks want deposits is to enable them grant loans
and advances from which they earn interest income. Extension of credit to the economy for the
financing of business enterprises is the core link that banks have to the real sector, acting like a
catalyst and contributing to the growth of the economy of the country. By financing
entrepreneurs’ production, consumption and commercial activities, banks lubricate the process of
economic growth with multiplier effect across all sectors of the economy. The various methods
by which banks can lend money to entrepreneurs include overdraft, medium and long term loans,
debt factoring, invoice discounting, asset finance including commercial mortgages and equity
finance.
3. Business Investment Promotion Roles: Because of the specialized and professional status of
banks, they are in a position to play investment promotion roles to entrepreneurs. Such roles may
include management of investment for customers, advice on sustainable lines of investment to
follow by analyzing the pros and cons of each investment alternatives to the entrepreneur-
customer.
4. Advisory, Guaranty and Consultancy Roles: In addition to the normal lending and other
service, banks now also engage in business advisory, guaranty and other consultancy services
which help immensely in the promotion and financing of entrepreneurship activities in the
country. It is well known fact that some enterprises/businesses fail simply because of
mismanagement, faulty investment decisions, inefficient capital and foul planning etc.
5. Other areas: Other areas in which banks could offer advisory and consultancy services to the
SMEs (Small & Medium Enterprises) include methods of control systems or measures to be
adopted by the enterprises with respect to defined lines of business or trend of challenges.
Advice on methods of raising capital or reorganization of a company to bring about the desired
level of efficiency. Advice on tax and tax related matters. Status enquiry services could be
offered to effect credit purchases within the domestic market or overseas.
The banks could also perform a great role in entrepreneurship development by organizing,
sponsoring and supporting entrepreneurship education and training programmes either directly or
in conjunction with other organizations and stake holders.

APPRAISAL OF LOAN APPLICATION BY FINANCIAL INSTITUTIONS

Getting term loans from a financial institution is not so easy. The corporate asking for the term
loan has to go through several tests. The bank follows an extensive process of credit appraisal
before sanctioning any loan. It analyses the loan proposal from all angles. The primary objective
of credit appraisal is to ensure that the money is given in right hands and the capital and interest
income of the bank is relatively secured.
While appraising term loans, a financial institution would focus on evaluating the credit-
worthiness of the company and future expected stream of cash flow with the amount of risk
attached to them. Credit worthiness is assessed with parameters such as the willingness of
promoters to pay the money back and repayment capacity of the borrower.
Four broad areas of appraisal by banks are a market, management, technical and financial.
 Market Appraisal
As part of the market appraisal, the very first thing a financial institution would look at is the gap
between demand and supply. Bigger the demand-supply gap, higher is the chances of the
flourishing of that business. The demand versus the proposed supply by the borrower should
have a wide difference in demand of 50000 units against the proposed supply of 10000 units.
Another most important parameter is marketing efforts and infrastructure. This is the factor
which converts a demand into sales for a business. The marketing side of the company needs to
be very strong as it is very critical to the success of the venture.
Management Appraisal
Management of the company needs to be appraised for their intentions, knowledge, and
dedication towards the project. By intention, it is meant to evaluate the willingness of the
promoters of the company to pay the money back. It needs to evaluate the real objective of
borrowing.
Only good intentions would not generate cash flows to honor the installments of the loan. The
management needs to be strong in terms of their knowledge about business, commitment towards
achieving the set goals etc.
Technical Appraisal
A technical appraisal is subject to the kind of business and industry of the borrower. If it’s a
manufacturing concern, all those parameters like project site, availability of raw material and
labour, capacity utilization, vicinity to selling market, transportation etc., would be examined. A
project needs to be technically very sound to be able to sustain all business cycles.

Financial Appraisal
After all the other kinds of appraisal, everything boils down to financial appraisal. This probably
is the most important part of credit appraisal of business loans. The reason is that it expresses
everything in terms of money.
Financial appraisal tries to assess the correctness or reasonability of the estimates of costs and
expenses and also the projected revenues. These may include the estimation of the selling price,
cost of machinery, the overall cost of the project and the means of financing.
Financial appraisal involves extensive financial modeling in excel. Basically, it takes the
financial statements of previous periods and forecasts the future financial position for at least till
the loan matures. From that, the cash flows of each year are compared with the installment of
loan because ultimately the cash flows are going to honor the payments of the bank.
Feasibility of the project is evaluated in terms of debt servicing capacity of the firm. Debt service
coverage ratio is a key ratio which is calculated for each future financial period and if that ratio is
satisfying the norms accepted by the bank, the loan would get another green signal.
VENTURE CAPITAL
What is Venture Capital?
It is a private or institutional investment made into early-stage / start-up companies (new
ventures). As defined, ventures involve risk (having uncertain outcome) in the expectation of a
sizeable gain. Venture Capital is money invested in businesses that are small; or exist only as an
initiative, but have huge potential to grow. The people who invest this money are called venture
capitalists (VCs). The venture capital investment is made when a venture capitalist buys shares
of such a company and becomes a financial partner in the business.
Venture Capital investment is also referred to risk capital or patient risk capital, as it includes the
risk of losing the money if the venture doesn’t succeed and takes medium to long term period for
the investments to fructify.
Venture Capital typically comes from institutional investors and high net worth individuals and
is pooled together by dedicated investment firms.
It is the money provided by an outside investor to finance a new, growing, or troubled business.
The venture capitalist provides the funding knowing that there’s a significant risk associated with
the company’s future profits and cash flow. Capital is invested in exchange for an equity stake in
the business rather than given as a loan.
Venture Capital is the most suitable option for funding a costly capital source for companies and
most for businesses having large up-front capital requirements which have no other cheap
alternatives. Software and other intellectual property are generally the most common cases
whose value is unproven. That is why; Venture capital funding is most widespread in the fast-
growing technology and biotechnology fields.
Features of Venture Capital investments
 High Risk
  Lack of Liquidity
 Long term horizon
 Equity participation and capital gains
 Venture capital investments are made in innovative projects
 Suppliers of venture capital participate in the management of the company
Methods of Venture capital financing
 Equity
 participating debentures
 conditional loan