Strategic Financial Management

CIA III

Submitted by: Submitted to:

Jyotika Nagdev Prof. Gupteswar Patel

2120722

Muskan Jain

2120733

Jasmeet Gujral

2120771

Usha Karki

2120829
 Table of Contents

S.N. Topic Page No.

1 Introduction 2

2 Risk Parameters of Financing Alternatives for 7

Startups

3 Risk Matrix 11

4 Best alternate source of finance 12

5 Risk matrix for alternate sources 16

6 Conclusion 19

7 References 20

1
Introduction
The startup ecosystem in India is expanding at a rate of about 20% each year, and it is
estimated that these companies add around 3% to the country's GDP. The current situation of
Indian startups is incredibly favourable, with 41 more unicorns being added to the list. India
now has 101 unicorn startups, making it the third-largest startup ecosystem globally.
PineLabs is one such startup that offers merchants digital payment options. Since its
establishment in 1998, PineLabs has expanded to rank among India's biggest suppliers of
digital payments and provides a vast array of goods and services, such as online payment
solutions, mobile wallets, and point-of-sale (POS) terminals. The breakdown of PineLabs'
initial funding sources is as follows:

Source Percentage

Bootstrapping 65%

Angel Investors 20%

Venture Capitalist funds 5%

Bank loans 10%

Alternate sources of funding used by Pine Labs Pvt Ltd.

Along with the above mentioned initial sources, Pine Labs over the years, also raised
funding from various alternate sources which have been described below.

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Short term loans: A short-term loan is a sort of loan that is paid back in a year or less. They
give startups access to quick funding that may be used for purchasing inventory, expanding
business, and paying for unforeseen costs.
● These loans often have terms less than a year, which is shorter than those of
standard bank loans.
● They have longer repayment horizons and higher interest rates. This is because
lenders are taking on more risk and might not have the same access to borrower
information.
● Furthermore, because these loans are frequently unsecured, the borrower is not
required to provide collateral or personal guarantees.
● Example- Payday loans, cash advances, Credit card cash advances.

Bootstrapping: Bootstrapping is the process of starting a business from scratch and growing
it without taking out any loans. It entails funding a company's operations with personal funds
and company earnings.
● Bootstrapping is a typical short-term form of financing for businesses in the early
stages of development.
● Bootstrapped companies have total control over themselves, and are more profitable
and resilient than firms that rely on outside capital.
● it reduces equity and debt commitments, lowering financial risks and maintaining
control.

Trade Credit: Trade credit is a short-term financing agreement between two businesses
wherein one business (the buyer) agrees to pay for goods or services received from another
business (the seller) later on credit.
● Usually, the buyer has between 30 and 90 days to reimburse the supplier.
● Trade credit is extremely simple to obtain and does not require any collateral.
● Trade credit agreements are often flexible; their conditions are negotiable, and they
can be customised to meet specific needs.

Long term:

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Venture Capitalists: An investor or an institution which offers funds to start-up and
early-stage businesses with significant growth potential in exchange for an equity stake is
known as a venture capitalist.
● Venture Capitalists provide easy access to large amounts of funding, which enables
startups to finance product development, grow their businesses, and enter new
markets.
● Additionally, venture funding frequently includes helpful advice and mentoring from
investors, assisting businesses in navigating the challenges of business expansion.
● Venture capital offers a longer-term partnership since investors have to wait a long
time for a return on their investment, aligning their interests with the startup's
long-term success.
● Example- Sequoia Capital, Insight Partners

Angel Investors: Affluent individuals who offer funding for a start-up, typically in
exchange for convertible debt or ownership stock.

● Beyond finance, their financial expertise and experience can assist firms in making
wise financial decisions and effectively allocating their resources.
● Angel investors frequently have a longer investment horizon, which is in line with
businesses' long-term objectives.
● Venture capitalists (VCs) invest capital that has been raised from other investors,
including endowments, pension funds, and insurance companies. On the other side,
angel investors put their own money into the business.

Bank Loans and SBAs (Secured Bank Loans): Small Business Administration (SBA) is a
government body that assists new and expanding small enterprises. Small firms can apply for
a range of credit programs from the SBA, including guaranteed loans, direct loans, and
microloans.
● Bank loans give entrepreneurs access to a long term regulated and dependable source
of funding with extended repayment terms.
● Government-backed SBA loans offer favourable terms and lower risk for lenders,
making it simpler for entrepreneurs to obtain finance .

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 ● The benefits include lower interest rates, specified repayment plans, and the
possibility to establish a good credit rating, which could lead to other funding
options as the business develops.
● Example: SBA Microloan, Disaster loan, Express loan

Working capital: is a fundamental indicator crucial to the financial stability of a startup. It

represents the difference between a company's current assets and current liabilities. It denotes
the resources accessible to pay for continuing operations, short-term obligations, and
everyday expenses. Working Capital assists in covering regular expenses even when revenue
varies, it ensures operational continuity. It additionally acts as a safety net for unforeseen
costs, promotes goodwill with suppliers through fast payments, increases investor confidence,
and simplifies debt servicing.

6 sources of Working Capital for startups :

Short term loans: A short-term loan is a sort of loan that is paid back in a year or less. They
give startups access to quick funding that may be used for purchasing inventory, expanding
business, and paying for unforeseen costs.
● These loans often have terms less than a year, which is shorter than those of
standard bank loans.
● They have longer repayment horizons and higher interest rates. This is because
lenders are taking on more risk and might not have the same access to borrower
information.
● Furthermore, because these loans are frequently unsecured, the borrower is not
required to provide collateral or personal guarantees.
● Example- Payday loans, cash advances, Credit card cash advances.

Bootstrapping: Bootstrapping is the process of starting a business from scratch and growing
it without taking out any loans. It entails funding a company's operations with personal funds
and company earnings.
● Bootstrapping is a typical short-term form of financing for businesses in the early
stages of development.
● Bootstrapped companies have total control over themselves, and are more profitable
and resilient than firms that rely on outside capital.

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 ● it reduces equity and debt commitments, lowering financial risks and maintaining
control.

Trade Credit: Trade credit is a short-term financing agreement between two businesses
wherein one business (the buyer) agrees to pay for goods or services received from another
business (the seller) later on credit.
● Usually, the buyer has between 30 and 90 days to reimburse the supplier.
● Trade credit is extremely simple to obtain and does not require any collateral.
● Trade credit agreements are often flexible; their conditions are negotiable, and they
can be customised to meet specific needs.

Microloans: Microloans are small loans, usually under $50,000, that are given to people or
small businesses with little access to traditional financing.
● Usually, SBA, microfinance companies, online lenders, or community development
organisations provide these smaller, unsecured loans.
● They are more easily accessible, have quicker approval times, and less rigid credit
standards, which are benefits for businesses.
● Microloans are primarily intended for startups and particular demographics like
women, minorities and veterans, who have trouble accessing traditional bank loans.

Overdraft: A temporary loan given by a bank to its current account holders to continue
making withdrawals or paying bills in excess of their bank balance.
● The benefits for startups are clear: without the requirement for a formal loan
application, it provides rapid access to additional funds to pay invoices, cover brief
cash flow problems, or take advantage of unforeseen opportunities.
● Overdrafts also provide flexibility because they are typically unrestricted and can be
used whenever necessary.
● Interest is only charged on the excess amount withdrawn.

Invoice factoring: A company that uses invoice factoring as a form of financing sells its
outstanding bills to a factor, or third party, at a discount. The factor then collects payments
from clients on the company's behalf.
● No collateral is required because the unpaid bills are being used as collateral by the
factor. For small firms that might not have much money, this might be a huge benefit.

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 ● Businesses may reduce their exposure to risks due to bad debts by using invoice
factoring. A customer's failure to pay an invoice is normally the factor's loss.
● Startups may boost their overall cash flow by reducing the amount of time they have
to wait to get paid by using invoice factoring.

Risk Parameters of Financing Alternatives for Startups

Financial risk is an inherent aspect of starting a business. Financial risk is generally

understood to represent the potential for losses brought on by changes in market
circumstances, including changes in how investments, financial instruments, and assets are
valued.
The financial risk involved in the above alternatives of financing are following:

a. Short term loans

Risk parameters:
● Higher interest rates: Short-term loans typically have higher interest rates than other
forms of financing, such as long-term loans or equity financing. The lack of collateral
raises the risk for lenders, which is why interest rates are higher. Entrepreneurs need
to carefully consider how these rates can affect the profitability of their company.
Statistic: the average interest rate for a short-term loan is 12.3%, compared to an average of
7.5% for a long-term loan.
● Quick Repayment: Short-term loans typically require faster repayment than their
long-term counterparts. While this can help entrepreneurs clear the debt quickly, it
also increases the pressure to generate revenue promptly. Failure to manage the
repayment schedule effectively can lead to financial strain.
Statistic: The average repayment term for a short-term loan is 6 months.
● Potential Fund Limitations: Short-term financing may have limitations on the
amount of funds that can be obtained. Some loans may be restricted to a percentage of
assets or income, making it challenging for startups with substantial expenses to
secure adequate capital.
Statistic: According to the Federal Reserve’s Small Business Credit Survey, only 25% of
startups were able to obtain a short term loan.
Analysis: short term loans should generally be considered as a source of financing when

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startups are in need of quick capital or need to purchase inventory to fulfill the high
demand or want to cover the temporary cash flow gaps.

b. Bootstrapping
Risk parameters:
● Limited resources: One of the benefits of bootstrapping is also one of its greatest
challenges. With limited resources and cash flow, startups may struggle to fund
essential operations, hire skilled talent, or invest in marketing. As a result, a lot hangs
on the ingenuity and determination of the founder and early team members to find
creative ways to deliver results on the cheap.
Statistic: According to a recent study of Bain & company only 35% of bootstrapped startups
are able to achieve annual revenue of $1 million or more.
● Slow growth rate: Bootstrapped startups often face a slower growth trajectory
compared to their venture-funded counterparts. Limited resources can hinder scaling
and expansion efforts, making it more challenging to compete with well-funded
competitors.
Statistic: The average bootstrapped startup takes twice as long to reach $1 million in
revenue as a startup that has raised venture capital.
● Distributed equity: Because money is tight and talent expensive, bootstrapping
founders often offer equity in the business as a "benefit". Over time, this leads to
equity being largely distributed among employees, making it harder for the business
to make decisions and reducing its desirability to investors.
Statistic: A study by the Harvard Business School found that startups with more than 10
equity holders are half as likely to be acquired as startups with fewer than 10 equity
holders.
Analysis: Bootstrapping should be considered as a source of financing when founders
prioritise control over capital and are willing to make personal sacrifices to sustain the
startup, and when the startup is in an early stage, unproven, or operates in a high-risk
industry where external funding is scarce.

c. Trade Credit
Risk parameters:

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 ● Dependency on suppliers: When a startup takes on trade credit, it becomes
dependent on its suppliers for financing. This can make it difficult for the startup to
switch suppliers or to negotiate better prices.
Statistic: According to a recent study, of Harvard business school,the average startup has
20 suppliers. This means that a startup that takes on trade credit from all of its suppliers
could become heavily reliant on them for financing.
● Reduced cash flow: Trade credit can reduce a startup's cash flow. This is because the
startup does not receive payment for its products or services until after it has paid its
suppliers.
Statistic: According to a recent study, the average startup takes 54 days to collect payment
from its customers. This means that a startup that takes on trade credit may have to wait up to
54 days before it receives payment for its products or services.
● Damage to creditworthiness: If a startup takes on too much trade credit, it can
damage its creditworthiness. This can make it difficult for the startup to obtain other
forms of financing, such as loans or lines of credit.
Statistic: According to a recent study, the average startup has a credit score of 650. A credit
score below 700 is considered to be subprime.
Analysis: Startups generally consider Trade credit as a source of finance when seeking
short-term financing to improve cash flow and gain favourable payment terms from
suppliers.

d. Venture Capitalists
Risk Parameters:
● Loss of control: When a startup takes on VC financing, it is giving up a portion of
ownership in the company. This can mean that the founders have less control over the
direction of the company. VCs may have a say in major decisions, such as product
development, marketing, and hiring.
Statistic: The average VC firm owns 25% of the companies it invests in.
● Pressure to meet expectations: VCs typically expect a high return on their
investment. This can put pressure on startups to grow quickly and generate profits. If
a startup is unable to meet the VC's expectations, the VC may pressure the founders to
make changes to the company.

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Statistic: As per the 2022 reports of Kruze Consulting, average VC fund expects a return
on investment of 20-30%.
● Exit strategy: VCs typically have a specific exit strategy in mind when they invest in
a startup. This could be an initial public offering (IPO), a merger or acquisition, or a
sale to another company. The exit strategy can have a significant impact on the
startup's future.
Statistic: As per Oxford business school survey of 2021, average time it takes for a
VC-backed startup to exit is 7-10 years.
Analysis: generally startups consider venture capital as a financing source, when seeking
significant capital to fuel rapid growth and expansion, want expertise and network of
venture capitalists to enhance the startup's success.

e. Angel Investors
Risk Parameters:
● Dilution of ownership: Angel investors are typically more involved in the day-to-day
operations of the company than venture capitalists. This can mean that the founders
will have to answer to the angel investors on a regular basis.
Statistic: according to the forbes business survey, the average angel investor expects to
meet with the founders of their portfolio companies on a quarterly basis.
● Pressure to meet expectations: Angel investors typically expect a high return on
their investment. This can put pressure on startups to grow quickly and generate
profits. If a startup is unable to meet the angel investor's expectations, the angel
investor may withdraw their support.
Statistic: as per forbes business survey, the average angel investor expects a return on
investment of 2-3x their investment.
Analysis: startups consider angel investing when seeking early-stage funding from
experienced entrepreneurs who can provide mentorship and guidance.

f. Bank loans & SBAs

Risk parameters:
● Personal liability: Bank loans and SBAs typically require personal guarantees from
the founders of the startup. This means that the founders are personally liable for the
loan if the startup is unable to repay it.

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Statistic: According to the Small Business Administration (SBA), 82% of SBA loans are
backed by personal guarantees.
● Restrictive covenants: it may come with restrictive covenants, which are restrictions
on the startup's activities. For example, a lender may covenant that the startup cannot
take on additional debt or that it must maintain a certain level of working capital.
Statistic: According to a recent study, 72% of bank loans contain covenants.
● Impact on credit score: Taking on a bank loan or SBA can impact the startup's credit
score. if the startup makes late payments or defaults on the loan, its credit score will
be damaged.
Statistic: According to a recent study, the average credit score for a startup is 650.
Analysis: startups consider bank loans When seeking established and reliable financing with
predictable repayment terms and have a strong financial track record and assets to serve as
collateral.

Risk Matrix
Based on the above analysis of risk parameters, following risk matrix can summarise the risk
reward relationship of different sources of finance:

Financing Source Likelihood of Risk Impact of Risk Risk Level

Occurrence

Short-term Loans Moderate High Medium

Bootstrapping Low Low Low

Trade credit Low Low Low

Venture Capital Low High medium

Angel investing Low moderate Low

Bank loans & SBAs Low moderate Low

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Best alternate source of finance
Among the six different alternate source of finance, venture capital is the best alternate source
of finance for a startup. The major reasons for selecting venture capitalists as the best option
are given below:

1. Accelerated growth through Venture Capital: Short-term loans may not provide
the huge capital necessary for considerable expansion. Bootstrapping relies on limited
personal money, which limits scalability, and trade credit may lack the large financial
support required for significant growth. On the other hand, venture capital serves as a
powerful booster for startup expansion. The main advantage is the large capital it
provides to an enterprise. With this financial boost, firms, particularly those with high
growth potential, are able to start on a quick expansion path that leads to
non-VC-backed competition. The relationship turns out to be a win-win situation,
with large profits for both entrepreneurs and venture investors.

2. Favourable option for financing: Since a venture capital firm's goal is to make
significant profits on an exit after 5-7 years, it invests in the company in exchange for
shares with the intention of assisting in its development. This implies that, unlike
bank loans or debts, it will not require regular monthly payments from your company.
It also doesn't have to pay interest - they only have unlimited funds to engage in your
development, such as utilising and creating a workforce, while short-term loans and
standard bank loans require monthly payments and interest, which can impact cash
flow. Also, bootstrapping is dependent on personal cash, which limits financial
possibilities and can slow growth.

3. Help in risk management by minimising the possibility of failure. Venture capital

serves as a strategic project for individuals in risky conditions. It not only brings in
capital but also a team of qualified experts. These specialists manage strategies,
undertake extensive market research, and give legal help, reducing the possibility of
severe complications. Short-term loans, on the other hand, lack the continuous
competence required for complete risk management. While bootstrapping is solid, it
focuses primarily on human abilities, exposing firms to unanticipated risks. Trade
credit, while helpful cannot compete with the complicated risk management provided

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 by venture capital. Venture capital, basically, is a comprehensive risk management
powerhouse for start-ups.

4. Long-term assistance in multiple areas: Venture capital represents business owners

because it is more than simply money and it is a long-term collaborator. Venture
capital firms take on investments for 5-7 years, compared to quick fixes like
short-term loans or depending only on personal resources (bootstrapping). They
continue to support the project beyond the first raising money and frequently
participate in other fund-raising efforts as key investors. Their extensive knowledge
sets them apart, assisting with everything from IT difficulties to strategic exits
through mergers and acquisitions. Other options for financing, such as short-term
loans, bootstrapping, trade credit, angel investing, and traditional bank loans, may
provide initial funds, but they lack the long-term commitment, expertise, and
diversified support that venture capital provides.

5. Opportunities for connections and networking: Venture capitalists operate as

strategic connectors for start-ups, using their broad network to link them with CEOs,
leaders, and industry experts. This network becomes a useful resource for start-ups,
helping in the formation of partnerships, the acquisition of clients, and the
identification of key staff members.

6. Helps in publicity and exposure: Securing venture capitalist financing provides a

booster for publicity, increasing the visibility of the company. This increased visibility
not only attracts a larger consumer base but also the attention of potential investors,
generating an upward trend that promotes business growth and financial assistance.

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 Fig: Graph showing the reasons for selecting Venture Capitalists as the best option

Parameters Venture Short-ter Bootstrapp Trade Angel Bank

capitalists m loans ing credit investors loans &
SBAs

Risk Medium Medium Low Low Low Low

Repayment No Short-term No 30 to 90 No Varies

Terms repayment repayment days repaymen
t

Collateral None May None None None Requires

require

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 Sustainability Long-term Short-term Varies Varies Varies Long-term
focus focus

Growth Very high Varies Varies Limited High limited

Potential

Network and Strong Not Limited Not HIgh Moderate

Expertise emphasis provided provided emphasis emphasis
on on on

Impact on May Risk to No impact No Varies Risk to

Credit Rating improve credit impact credit
credit

Large funds Capable Not Varies Not Capable Capable

of capable Capable
providing
large
funds

Impact on Dilution No dilution No dilution No Dilution No

Ownership dilution dilution

Accessibility Moderate Typically Limited Common Moderate Common

access easy access

Table: Comparison between different financing alternative sources for startups

The above table compares six different financial alternatives for a startup in ten different
parameters. The above table shows how among all the different financial alternative venture
capitalists is the best one for a startup.
The venture capitalist is suitable for startups with very high growth potential as it puts more
emphasis on long term growth of the company rather than the short term. Their main focus
lies on supporting the business that has potential to achieve rapid as well as sustainable
growth. This makes it a better option as compared to other financing options, such as
short-term loans and bootstrapping, which may not provide necessary large funds to achieve
long term goals. The other major advantage of venture capitalists is the network and expertise

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that comes with it. While other financial alternatives can also provide an adequate amount of
capital, the venture capitalists provide something invaluable- expertise, industry knowledge,
vast network of contact which plays a major role in growth of a startup in any field.

Risk matrix for alternate sources

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17
 Fig:Infographic
Among the alternative sources of finance highlighted, "Peer-to-Peer Lending" is frequently
regarded as one of the greatest possibilities for startups. Peer-to-peer lending allows
entrepreneurs to borrow money from individuals or investors directly through online
platforms, avoiding traditional financial institutions. This strategy provides greater flexibility
and potentially lower interest rates than traditional loans, making it appealing to businesses
that may lack established credit records or collateral. Furthermore, peer-to-peer lending can
be a quick and easy option for entrepreneurs to get the funding they need to fuel their growth,
especially if they are having difficulty securing bank loans or raising venture capital. It taps
into the power of the crowd to provide a variety of funding choices for companies wishing to
expand their operations.

Financing Option Likelihood of Risk Impact of Risk Risk Level

Occurrence

Crowdfunding Low Low Low

Peer-to-Peer Moderate Moderate Medium

Lending

Invoice Financing Moderate Moderate Medium

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 Asset-Based Low Low Low
Lending

Merchant Cash Moderate High High

Advances

Conclusion
We have looked at a variety of alternate sources of finance for start-up, such as short-term
loans, bootstrapping, trade credit, venture capitalists, angel investors, bank loans, and SBAs.
These choices were assessed according to the risk parameters that went along with them. Of
all these funding options, venture capital has shown to be the most beneficial for companies
because it can lead to quick expansion, ongoing assistance, connections, and increased
visibility. We also presented peer-to-peer lending as an accessible and adaptable financing
option for business owners. The best source of funding for a startup will depend on its needs,
development plan, and risk profile. Peer-to-peer lending and venture capital are two excellent
options for entrepreneurs looking to propel their companies forward.

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References

● https://www.bdc.ca/en/articles-tools/start-buy-business/start-business/start-up-fi

nancing-sources

● https://www.businessnewsdaily.com/1733-small-business-financing-options-.html

● https://www.ey.com/en_nl/finance-navigator/12-sources-of-finance-for-entrepren

eurs-make-sure-you-pick-the-right-one

● https://www.toppr.com/guides/business-management-and-entrepreneurship/grow

th-challenges-entrepreneurial-venture/sources-of-financing-business/

● https://www.fundera.com/business-loans/guides/startup-funding

● https://startups.co.uk/funding/sources/business-finance-6-sources-of-finance-for-

a-business/

● https://www.sbmarketingtools.com/guide-alternative-sources-financing-small-bu

sinesses/

● https://www.floridatrend.com/article/23243/alternate-source-of-funding-for-start

ups-and-early-stage-companies

● https://www.score.org/resource/blog-post/what-type-financing-makes-most-sense

-my-business

● https://entrepreneurhandbook.co.uk/sources-of-funds-for-business/

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