MODULE 3 SESSION 1:

THE ENTREPRENEUR FINDING

HIS RESOURCES
Instructor: Jan Mauryn B. Mahusay

 WHAT IS THIS SESSION

ABOUT?
This session will provide you the
necessary knowledge and skills on how
you will acquire suf cient star ting
capital to set-up a viable business.
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 WHAT WILL YOU LEARN?

• At the end of this session you will learn

on how to develop measures to
manage your working capital & prepare
a budget for your business.

• We will able to identify the Principles of

Actions & Evaluate Starting Capital
Options.

 LET’S STUDY

Businesses can raise capital in either of two ways: debt, or equity.

• Debt is when a business borrows money and has an obligation to

pay money back over time with interest, e.g., a loan.

• Equity is when money is invested into the company in exchange

for ownership rights, e.g., founders investing their own money in a
start-up.

AVENUES
FOR FINDING
STARTING
CAPITAL

 1. Sel
Avenues for nding Starting Capital • This is when one decides to personally nance their business idea.

• The individual will look carefully into their idea and see areas that will
bring money to the business.

• There are a number of ways this can happen. It can be through use of
personal savings, use of one’s pension funds, bootstrapping, utilizing
underutilized assets, etc

• Self- nancing is the number-one form of nancing used by most business

start-ups. Self- nancing includes using your own money to invest directly
in the business and using your personal assets as collateral for outside
funding.
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 1. Self (cont.

Avenues for nding Starting Capital Personal Savings

• Using your own savings is that there’s no cost apart from the lost
opportunity to earn interest, but of course you need to consider the risk if
things go wrong (more on that later). And unless you’re very rich, relying
only on your savings may not be enough to fund a business, especially as it
grows larger. If you have a healthy balance in your savings account, this is the
most obvious source to draw on. Thousands of business owners have also
tapped their retirement funds

Utilizing underutilized assets are things with xed costs that are not
being used as much as they could be. They are important because they can be
used more and from their owner’s perspective all additional usage is free. Money
rounds or “Paluwagan” and Maximizing bene ts from suppliers.
)

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Avenues for nding Starting Capital
2. Informal Secto
• This is mainly though the social networks one has made through friends,
family, and colleagues at work places or people in one’s neighbourhood.
These different networks can provide capital to an individual based on
not only their belief in the business idea but also the trust they have
gained over a period of time. They include among others business angels,
co-operative societies and maximizing bene ts from suppliers

Family, Friends and other

• Are common grounds for early-stage source of pre-seed and seed

nancing. When businessman seeks capital from these sources most or all
of the investors in the business have some close personal connection to
the founders for or for worse.
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Avenues for nding Starting Capital

2. Informal Sector (cont.

Business Angel

• Angel Investor groups are collective angel networks that share

information about potential investment opportunities for other angels

Money Lender

• A person whose business is lending money to others who pay

interest.
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 3. Formal Secto
Avenues for nding Starting Capital • This is the most dif cult of the different sources since it requires a lot of skill,
persistence and a certain level of accomplishment in society.

• The formal institutions will ordinarily give more money to any start up
compared to informal sector and self-funding.

• However, trends show that their money is encumbered with issues like
collateral/security, past performance nancial reports and also very high
interest rates.

• In the Philippines, the formal sector involves among others; Banks loans,
venture capitalists, leasing companies, micro credit institutions, overdraft
facilities, and government loans included on Financial Institutions &
Government Programs.

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 2. Formal Sector (cont.

Avenues for nding Starting Capital
A. Financial Institution

• Is responsible for the supply of money to the market through the transfer
of funds from investors to the business in the form of loans, deposits and
investments

Overdraft Facilitie

• An overdraft facility is a credit agreement made with a bank that allows

an account holder to use or withdraw more money than they have in
their account up to the approved limit. The sanctioned overdraft limit and
the interest charge will vary based on the nature of the asset offered as
collateral.
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 3. Formal Sector (cont.

Avenues for nding Starting Capital Leasin

• A contract outlining the terms under which one party agrees to rent
property owned by another party

Venture Capitalist

• Is a private equity investor that provides capital to businesses exhibiting

high growth potential in exchange for an equity stake

Bank Loan

• Small business loans is granted to entrepreneurs and aspiring entrepreneurs

to help them start or expand business.
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 3. Formal Sector (cont.

Avenues for nding Starting Capital Mortgage

• Are loans distributed by banks to allow consumers to buy homes they can’t pay for
upfront

Micro-Credit Institution

Are organizations that provide loans to low-income clients including micro companies
and the self- employed, which rationally lack access to mainstream sources of nance
from banking institutions .Fund small entrepreneurs in developing countries. These
entrepreneurs run what are known as micro-enterprise

B. From Government Program

• A grant is a sum of money given to an individual or businesses both nancially, in the

form of grants, and through access to expert advice, information and services.
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THE 6
PRINCIPLES
OF ACTION

 Exploit Exploit bootstrapping possibilities. What probable

The 6 Principles of Action
sources do you know of? Do not limit your
Bootstrapping options and be as creative as you can be when
Possibilities! exploring startup capital sources.

Analyze the cost of capital from different sources.

Raise Funds From Use capital budgeting techniques like Return on
Investment to determine if the cost of capital is
the Right Sources. commensurate with your desired rate of return.
Determine credibility of your capital source.
 Sometimes investors will ask you to stay in touch
and keep them abreast of your progress. This
The 6 Principles of Action
Make Progress may sounds like a blow-off but it's not. If you
While You Wait. report back to them in a few months that you've
nished your product better or landed a few big
customers, they may then decide to invest.

Do not use funds acquired to start up a business

Be Sure That the to do something else, like buy car, take friends
Money Hatches out to a party, pay school fees etc. It is not ethical
and will result in economic constraints like failure
Money. to pay up your obligations when they fall due.
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 Your business and your personal needs are two
Pay Yourself a separate entities. Cash out ows from the business
Salary and Use should not be cash in ows to satisfy your personal
The 6 Principles of Action
needs. Include in your operational costs, how much you
the Pro ts for Re- will take home (salary) and use that to cater for your
personal needs. Any pro ts from the business must be
Investment. re-invested.

If you talk to investors, you'll get feedback on your business

idea. If you hear the same thing a few times, take those
comments seriously. Keep Your Eye on the Prize. Don't let
looking for money stop you from pursuing your business idea.
If you spend all your time begging for money, you may not
Take Feedback. make any progress. If you hear the same thing a few times,
take those comments seriously. Smart entrepreneurs are agile
and adapt quickly. It's a great idea to have one of your
partners in the business focus on fundraising while the other
partners focus on growing the business.
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OTHER
CONDITIONS
THAT ENHANCE
FINDING
STARTING
CAPITAL
 Educational Background

57% of entrepreneurs have a post-secondary education

In the poorest countries, only 23% of the entrepreneurs
have a postsecondary education.

And almost 50% of the entrepreneurs in low-income

nations have not successfully completed secondary education.

 Economic Conditions

In most countries regardless of GDP per capita, people involved in business start-ups are
currently employed elsewhere. (GEM, 2004) This implies that the fact that these people
earn salary, then, it is much easier for them to set aside part of their income as savings that
can later be translated into start-up capital. Also, given the fact that they are employed,
then it means they have a number of networks from friends and colleagues at work. This
automatically improves on their opportunities for nding start-up capital

Although GEM, 2003 & 2004 showed that the Philippines was one of the most
entrepreneurial countries in the world. The nature of business start-ups was inferior to the
start-ups in the developed economies. This implies that when the country’s economic
conditions are not favourable then the nature of start-ups will not be that very
competitive. Issues like the interest rates, taxes, GDP per capita, in ation, unemployment,
etc. determine the economic conditions.
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 Cultural and Social Norms

Cultural support is positively linked with the amount of entrepreneurial

activity (GEM, 2004). In economies where the entrepreneurial mindset is
fuelled, the chances of getting start-up capital also increase. This could mean
that the society while fuelling entrepreneurship will avail the entrepreneurs
with a variety of option in which they can source funds.
 Novelty of Idea

There are increasing opportunities for new rms employing new technologies
to displace less ef cient incumbents (GEM, 2004). Knowledge and Research
are widely recognized as being the key to the future. One can easily nd
funding for a new idea compared to one who is replicating the idea.

In the Philippines, the president’s of ce has set aside a special fund to promote
innovative ideas, this will automatically make it easier for entrepreneurs with
new ideas to nd start-up capital compared to those who are replicating.
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EVALUATING
STARTING
CAPITAL
OPTIONS
 THE RISK / RETURN TRADE-OFF

This is the principle that potential return rises

with an increase in risk. Low levels of
uncertainty (low risk) are associated with low
potential returns, whereas high levels of
uncertainty (high risk) are associated with
high potential returns.

According to the risk-return trade-off,

invested money can render higher pro ts only
if it is subject to the possibility of being lost.

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 Capital Risk: Losing your invested money.

In ationary Risk: Investment's rate of return doesn't keep pace

with in ation rate.

Interest Rate Risk: A drop in an investment's interest rate.

Market Risk: Selling an investment at an unfavourable price.

Types of Risk
Liquidity Risk: Limitations on the availability of funds for a speci c
period of time.
Legislative Risk: Changes in tax laws may make certain investments
less advantageous.
Default Risk: The failure of the institution where an investment is
made.
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 CAPITAL BUDGETING

Capital budgeting (or investment appraisal) is the planning process used to

determine whether a rm's long investment such as new machinery,
replacement machinery, new plants, new products, and research and
development projects are worth pursuing.
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 Capital Budgeting Process

This is the planning process used to determine whether a rm's long term
investment such as new machinery, replacement machinery, new plants, new
products, and research and development projects are worth pursuing. Many
formal methods are used in capital budgeting such as: Return on Investment
(ROI) this is a measure of cash (or potential cash) generated by an investment,
or the cash lost due to the investment and the payback period.

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 Return on investment is a rate of pro t or income (realized or
unrealized). The return is sometimes adjusted for taxes consume a signi cant
portion of pro ts or income. Taxes are an expense which may or may not be
considered when calculating ROI. Similarly, a return may be adjusted for
in ation to better indicate its true value in purchasing power

ROI is a measure of cash (or potential cash) generated by an investment, or the

cash lost due to the investment. It measures the cash ow or income stream
from the investment to the investor. Cash ow to the investor can be in the
form of pro t, interest, dividends, or capital gain/loss. Capital gain/loss occurs
when the market value or resale value of the investment increases or
decreases. Cash ow here does not include the return of invested capital.
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