II M.

COM
Unit-2: -Factoring and Venture Capital Teaching Hours: 15 Hrs
Factoring – Types and Features of Factoring agreement - Legal aspects of
Factoring – Factoring in India – Steps involved in Factoring – Seed Capital –
Bridge capital -Venture Capital – meaning and characteristics –Criteria for
assistance – Schemes and guidelines.

Introduction
 Factoring is of recent origin in Indian Context.
 Kalyana Sundaram Committee recommended introduction of factoring in
1989.
 Banking Regulation Act, 1949, was amended in 1991 for Banks setting
up factoring services.
 SBI/Canara Bank have set up their Factoring Subsidiaries:-
1) SBI Factors Ltd., (April, 1991)
2) CanBank Factors Ltd., (August, 1991).
 On January 22, 2012, the Central Government published the Factoring
Regulation Act, 2011.
 RBI has permitted Banks to undertake factoring services through
subsidiaries.
What is Factoring?
The word 'Factoring' is derived from Latin word 'Factor' which denotes 'doer'. The
definition of the word factor is "One that lends money to producers and dealers on the
security of accounts receivables".
Factoring means a financial transaction which involves a firm selling its invoices of
accounts receivables to a third party, which is also known as a 'Factor'. Such transfer is
generally made at a discount and the firm is provided with the instant cash for financing its
ongoing business.

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Factoring - Definition:
Factoring is defined as ‗a continuing legal relationship between a financial institution
(the factor) and a business concern (the client), selling goods or providing services to trade
customers (the customers) on open account basis whereby the Factor purchases the client‘s
book debts (accounts receivables) either with or without recourse to the client and in relation
thereto controls the credit extended to customers and administers the sales ledgers‘.
Factoring is also known as receivables factoring or invoice financing
The parties involved in the factoring transaction are:-
1) Supplier or Seller (Client)
2) Buyer or Debtor (Customer)
3) c)Financial Intermediary (Factor)
Parties in Factoring
In the factoring model, the entities involved include:
1) Business: The firm sells its accounts receivable to acquire immediate funding and
other associated services.
2) Factor: A third-party agency that buys the accounts receivable, provides instant
funding to the business, and takes over collections and other functions.
3) Debtor: The client who has received the goods or services and is obligated to make
payment.

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Features of Factoring
The characteristics of Factoring are as follows:
1. The Nature
The nature of the Factoring contract is similar to that of a bailment contract. Factoring
is a specialized activity whereby a firm converts its receivables into cash by selling them to a
factoring organization. The Factor assumes the risk associated with the collection of
receivables, and in the event of non-payment by the customers/debtors, bears the risk of a bad
debt loss.
2. The Form
Factoring takes the form of a typical Invoice Factoring since it covers only
those receivables which are not supported by negotiable instruments, such as bills of
exchange, etc. This is because, the firm resorts to the practice of bill discounting with its
banks, in the event of receivables being backed by bills. Factoring of receivables helps the
client do away with the credit department, and the debtors of the firm become the debtors of
the Factor.
3. The Assignment
Under factoring, there is an assignment of debt in favor of the Factor. This is the basic
requirement for the working of a factoring service.
4. Fiduciary Position
The position of the Factor is fiduciary in nature, since it arises from the relationship
with the client firm. The factor is mainly responsible for fulfilling the terms of the contract
between the parties.
5. Professionalism
Factoring firms are professionally competent, with skilled persons to handle credit sales
realizations for different clients in different trades, for better credit management.
6. Credit Realizations
Factors assist in realization of credit sales. They help in avoiding the risk of bad debt loss,
which might arise otherwise.
7. Less Dependence
Factors help in reducing the dependence on bank finance towards working capital. This
greatly relieves the firm of the burden of finding financial facility.

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8. Recourse Factoring
Factoring may be non-recourse, in which case the Factor will have no recourse to the
supplier on non-payment from the customer. Factoring may also be with recourse, in which
case the Factor will have recourse to the seller in the event of non-payment by the buyers.
9. Compensation
A Factor works in return for a service charge calculated on the turnover. Actor pays
the net amount after deducting the necessary chares, some of which may be special terms to
handle the accounts of certain customers.
Advantages of Factoring
The advantages of Factoring are:
1. Immediate Cash Flow:
This sort of financing shortens the cash collection period. It facilitates quick cash
realization by selling receivables to a factor. The availability of liquid cash can often be the
factor for grabbing and giving up an opportunity. The cash boost given by factoring is
readily available for capital expenditures, completing a new order, or meeting an
unexpected condition.
2) Focus on Business Operations and Growth:
By selling off invoices, business owners may relieve themselves of the burden of
collecting payments from customers. Receivables department resources can be focused on
business operations, financial planning, and future growth.
3. Bad Debt Evasion:
There are two sorts of factoring: with recourse and without recourse. In the case of
bad debts, the factor bears the loss without recourse factoring. As a result, once the seller
sells its receivables, it has no responsibility to the factor.
4. Quick Finance Arrangement:
Factors provide funds more quickly than banks. Compared to other financial
institutions, factoring provides a faster application, less documentation, and faster
settlement of funds.
5. No requirement for security:
The advances are made based on the strength of the receivables and their
creditworthiness. Factors, unlike cash credit and overdraft, do not require any collateral
security to be pledged or hypothecated. New enterprises and startups with significant
receivables can readily qualify for advances. Factoring, unlike typical bank loans, does not
necessitate the use of your house or other property as security.
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6) Customer Analysis:
Factors give significant guidance and insights to the seller on the credit quality of
the party from whom receivables are due. It helps in the negotiation of better terms between
the parties in futures contracts.
7) Time Savings:
Factoring can save the firm time and effort that would otherwise be spent collecting
from consumers. That energy can be applied to other business-building tasks such as sales,
marketing, and customer development.
8) Cheap source of finance:
It is a cheap source of finance than any other means such as banking.
9) No charge on Assets:
It does not create any charge on the assets.
Disadvantages of Factoring
The disadvantages of Factoring are:
1. Expensive:
This can be an expensive source of finance when the invoices are numerous and
smaller in amount.
2) Higher interest rate:
The advance provided is generally available at a higher interest cost than the usual
rate.
3) Involvement of third party:
 The factor is the third party to the customer who may not feel comfortable while
dealing with it.
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Types of Factoring

Types of Factoring in Financial Services

Factoring is a financial tool that provides the seller of goods (client) with an advance
against the accounts receivable. It improves liquidity, leads to better working capital
management, and is also easier to obtain than traditional bank finance, especially for small
and medium enterprises.
There are various types of factoring in financial services, and businesses can
choose the one most suitable for them based on the exigencies of the businesses; factors like
collateral, location of the factoring services, payment terms & the track record of
the company providing the factoring services.
1. Recourse Factoring
Under recourse factoring, the factor does not assume the credit risk or the risk of
default by the customer. Credit risk is the risk of customers defaulting on their payment
obligation. If the customer does not pay the dues on the due date, the factor will seek recourse
against the client and exercise the right to recover the amount from the client. The factor
provides sales ledger management services; however, the client bears the credit risk.
2. Non-recourse Factoring
In non-recourse factoring, the factor bears the credit risk in addition to providing other
services. Thus, even if the customer defaults on the due date, the factor cannot claim the
amount back from the client. Naturally, the fees charged for non-recourse factoring services
are higher than those for recourse factoring as they involve the cost of bearing the risk of
non-payment by the customer. The pricing in the case of non-recourse factoring tends to be
on the higher side.

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Recourse vs. Non-Recourse Factoring
If you‘re still not sure what the differences are between recourse vs. non-recourse
factoring, check out the summary table below:
NO N -RE CO URSE
RE CO URSE FACTO RING FACT O RING

Who Has the

Liability of Non-
Payment? The client The factor

Advance Rates Typically higher Typically lower

Cost Typically costs less Typically costs more

Speed of
Approval Typically faster Typically slower

Recourse factoring is typically Non-recourse factoring is typically

better for clients with reliable better for those with a higher risk of bad
Which Is Best for customers and those who want debt due to less reliable or riskier
Me? lower factoring fees. customers.

3. Disclosed Factoring (or) Bulk Factoring (or) Notified Factoring

Disclosed factoring is also called bulk factoring or notified factoring. Under
disclosed/bulk/notified factoring, the factor immediately discloses the fact of assignment of
debt by the client to the buyer/importer.
The supplier places a notice on the buyer/importer‘s invoice instructing them to make
payment directly to the factor. This is usually referred to as the Notice of Assignment.
4. Non-disclosed Factoring (or) Non – Notification Factoring (or) Confidential Factoring
In a non-notification or non-disclosed factoring or confidential factoring deal, the
buyer is completely unaware of the vendor‘s financing arrangement with the factoring
company. The factor only provides an advance against invoices; the customer makes the
payment directly to the client without being aware of the factoring agreement.
The client collects the payment from the customer and remits the due amount to the
facto. Some businesses prefer this type of factoring as it allows businesses to deal directly
with the customers and establish a better relationship.

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5. Domestic Factoring
Domestic factoring involves three parties - the client (the seller), the customer (the
buyer) and the factor (the financial entity). All the parties are located in the same region.
Domestic factoring is also far easier to operate and execute since cultural, legal and trade
barriers between the trading parties are more or less similar.
In sharp contrast, factoring solutions for export transactions requires a much deeper
skill set, understanding of international trade processes, and a strong global presence and
network of buyers and sellers.
6. Export Factoring
In export factoring there may also be an additional party - the import factor (factor
located in the customer‘s region) in addition to the client, the customer, and the export factor
(in the client‘s region). The import factor is responsible for services like determining
creditworthiness and credit limit for the customer and collecting money from the customer on
the due date and remitting it to the export factor.
Types of Export Factoring
a) Discount Factoring
In this case, the lender gives exporters money based on their receivables before getting
paid by the importer. The rates on these funds change based on their discount rate and how
long the term is.
b) Collection Factoring
By using this service, the exporter gets paid by the financier when receivables are due.
So, there is no chance that the importer will not pay at the agreed-upon time.
Benefits of Export Factoring
Some of the common benefits of export factoring are:
a) Quick way of obtaining money
When an exporter sells accounts receivable to a factor, money is received right away.
This upfront payment can help a business meet its immediate cash flow needs. With an
instant infusion of capital, a business can run more smoothly.
b) Better money flow and more working capital
Export factoring is a must if you want a steady flow of cash. If a business gets a lot of
money, it might use it to buy more supplies and thus, grow.
c) No repayment challenges
The financier will try to collect from the importer. So, the exporter does not have to worry
about getting this payment and can focus on other parts of the business.
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 d) Less risk
The risk of getting paid by the importer falls on the export factoring financier. If an
importer stops making payments, the exporter will not have to pay for those costs.
With export factoring, a business can ease off the burden of payments and finances and gets
the working capital it needs to run operations.
7. Advance Factoring
 Under advance factoring arrangement, a factor pays 75% - 90% (as per the
contractual agreement) of factored receivables in advance to the client. This is
done within a couple of working days from the presentation of the invoice to
the factor.
 The balance amount is paid on the guaranteed payment date on the realization
of money from the customers, as per the contract.
 The factor charges an agreed rate of interest for the advance payment made to
the business. This interest is called a discount.
 This discount charge depends upon various factors like short-term rate,
turnover, the financial standing of the business, etc.
 The business may opt for advance factoring if it needs immediate liquidity.
However, if there is no immediate requirement of cash for invoices, then the
business may opt for maturity factoring. Both types of factoring can be with or
without recourse.
8. Maturity Factoring
 Maturity factoring is also known as collection factoring. Under this type of
factoring, the factor collects dues from the customer. It passes the agreed upon
share to the client usually on the maturity date of each month's sales invoices.
 Sometimes the due date can be a fixed date, usually pre-decided, based on the
average payment period taken by the supplier.
 The factor takes care of everything related to bookkeeping, collecting, and
recording of payments over time. Maturity factoring can be with or without
recourse as per the terms and conditions of the contract.

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9. Full-Service Factoring (or) Full Factoring (or) Old Line Factoring
In full-service factoring (also known as full factoring), the factor performs a full range
of services, including maintaining a sales ledger, sending regular statements of accounts to
the client, collection of receivables, and credit control - gauging the creditworthiness of the
customer, deciding credit limits and credit insurance for bearing the credit risk.
Businesses prefer it as it eases pressure on the accounting division and frees up the
company's scarce resources, which can be put to optimal use, given the entire gamut of
services, this type of factoring charges the highest rates for services. Beyond the discount
charges (interest charges), the administrative cost of factoring ranges between 0.5% to 2.5%
of receivables;
10. Spot versus Regular Factoring
Spot factoring, also known as single invoice factoring, is a way for companies to improve
cash flow without taking out a loan or selling equity. Spot factoring differs from
traditional invoice factoring because it is primarily used to factor a single large invoice, rather
than a set of invoices. It tends to be more expensive than traditional factoring, but it allows a
company to get paid on its large individual invoice immediately, rather than waiting for its
customer to pay
.Distinguish between Bills Discounting and Factoring

Definition of Bill Discounting (or) Invoice Discounting (or) Invoice Financing

Bill discounting, also known as invoice discounting or invoice financing, is a

financing arrangement where a business sells its unpaid invoices to a financial institution at a
discounted rate. The business receives immediate funds, usually a percentage of the invoice
value, while the financial institution assumes the right to collect the full payment from the
debtor. Bill discounting allows businesses to address immediate cash flow needs without
waiting for their customers to make the payment.
Parties in Bill Discounting
In the realm of bill discounting, the key participants are:
1) Business: The organization that sells its invoices to generate immediate cash.
2) Financial Institution: The entity that acquires the invoices at a reduced rate and
offers instant funding to the business.
3) Debtor: The business customer responsible for settling the payment for goods or
services received.

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Advantages of Bill Discounting
Bill discounting offers various perks, such as –
1) Quick Cash Access – Enables businesses to plug cash flow gaps without awaiting
invoice settlements.
2) Selective Discounting: Businesses can opt to discount specific invoices based on
immediate cash needs.
3) Collection Control: Businesses maintain authority over collecting payments from
debtors.
4) Enhanced Liquidity: By turning unpaid invoices into immediate cash, liquidity and
working capital management are improved.
Distinguish between Bill Discounting and Factoring
Criteria Bill Discounting Factoring
Nature of Short-term financing against the Sale of accounts receivable or invoices
Transaction discounted value of a bill of exchange to a third-party (factor) at a discount
or promissory note
Parties Involved Involves the drawer of the bill (seller), Involves the seller (client), the buyer
the drawee (buyer), and a financing (debtor), and the factor (financing
institution company)
Financing Provides immediate cash flow by Provides immediate cash flow by
receiving a discounted value of the bill selling invoices or accounts receivable
from the financing institution to the factor
Ownership of The seller retains ownership of the bill The factor takes ownership of the
Receivables and is responsible for collecting accounts receivable and is responsible
payment from the buyer for collecting payment
Risk and The seller remains responsible for The factor assumes the risk of non-
Responsibility credit risk, collection, and credit payment and is responsible for credit
control control and collection
Invoice The financing institution generally The factor verifies the authenticity and
Verification verifies the authenticity and validity of the invoices
acceptance of the bill
Use of Collateral Collateral may or may not be required, Collateral may or may not be required,
depending on the creditworthiness of depending on the creditworthiness of
the drawer and the buyer the invoices
Relationship with The seller maintains a direct The factor may establish a direct
Buyer relationship with the buyer, who is relationship with the buyer for payment
obligated to pay the bill collection
Confidentiality The transaction details are generally The factor may have direct contact with
kept confidential between the the buyer, and the transaction details
financing institution and the seller may not be confidential

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Repayment The seller repays the financing The factor collects payment directly
institution after the buyer settles the from the buyer and deducts the amount
bill on its due date advanced to the seller
Focus Focuses on short-term financing and Provides comprehensive accounts
working capital needs of the seller receivable management, credit
protection, and working capital
solutions
Control of The seller maintains control over the The factor assumes control over
Collections collections and is responsible for collections and follows up with the
pursuing payment buyer for payment
Financing Fees The financing institution charges The factor charges fees based on the
interest or discount fees based on the invoice value, creditworthiness, and
bill's value and creditworthiness services provided
Examples Discounting a post-dated check, bill of Selling invoices to a factoring company
exchange, or promissory note with a for immediate cash flow and credit
bank management

Procedure (or) Process of Factoring

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 1) The seller sells the goods to the buyer and raises the invoice on the customer.
2) The seller then submits the invoice to the factor for funding. The factor verifies the
invoice.
3) After verification, the factor pays 75 to 80 percent to the client/seller.
4) The factor then waits for the customer to make the payment to him.
5) On receiving the payment from the customer, the factor pays the remaining amount to
the client.
6) Fees charged by factor or interest charged by a factor may be upfront i.e. in advance or
it may be in arrears. It depends upon the type of factoring agreement.
7) In case of non — recourse factoring services factor bears the risk of bad debt so in that
case factoring commission rate would be comparatively higher.
8) The rate of factoring commission, factor reserve, the rate of interest, all of them is
negotiable. These are decided depending upon the financial situation of the client.
The factor gets control over the client‘s debtors, to whom the goods are sold on credit or
credit is extended and also monitors the client‘s sales ledger.
Legal Aspects of Factoring
The following are the legal aspects of factoring:
1) The sale is taking place on a credit basis and the factor takes the responsibility for
collecting payment from the buyer. For this purpose, the agreement between the seller
and the factor should clearly state the role of each party involved in the sale.
2) The seller should give due authority to the factor for collecting money from the buyer.
3) Legally, the claim on the buyer is assigned by the seller to the factor. For this, a letter
of authority is given by the seller to the factor.
4) The buyer is also informed by the seller that he should make payment only to the
factor.
5) All the rights of the seller on the buyer now get transferred to the factor in his
capacity as an assignee.
6) In case of default by the buyer, it is the factor who will take action against the buyer
in his capacity as an assignee.
7) No other creditor can have any claim settled with the buyer towards the sale of goods
except the factor.
8) The banker will be informed that he should not finance the seller for any post sales
requirements or accounts receivable discount, as it is the factor who has been assigned
with the bills.
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 9) Disputes arising between the seller and buyer should be settled by the parties
concerned and they should not affect the factor.
10) The factor must have the right to take legal action against the buyer in the case of
default.
List of the Top India Factoring Companies
1) Aaditya International.
2) Inrplus. loan against property in uttam nagar. ...
3) salsabeelahmedandco. best ca firms in bangalore. ...
4) Need help selecting a company? ...
5) Botmatic Solutions Pvt. ...
6) Taxtrix. ...
7) Daftary & Company. ...
8) Chandra Credit.
Seed Capital - Meaning
Seed capital is the initial amount of money an entrepreneur uses to start a business.
Often, this money comes from family, friends, early shareholders or angel investors. Seed
capital is typically used to support the planning of a business up to the point when the
company starts selling a product or service.
Bridge capital- Meaning
Bridge capital is temporary funding that helps a business cover its costs until it can
get permanent capital from equity investors or debt lenders. The repayment terms for bridge
capital vary, but usually payment is made in full when the company receives the new capital
or a longer-term loan.

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Venture Capital - Introduction
World Level:
The origins of venture capital can be traced back to the post-World War II era, when
investors began to realize the potential of funding high-risk, high-reward projects. The first
VC firm, American Research and Development Corporation (ARDC) was founded in 1946
by Georges Doriot. Harvard Business School professor General Georges F. Doriot is often
referred to as the ―Father of Venture Capital.‖
India Level:
 The need for venture capital financing was first felt in 1972 by the Committee on
Development of Small and Medium Entrepreneurs under the chairmanship of Shri
R.S. Bhatt (popularly known as the Bhatt Committee).
 It was introduced in 1975 by all-India financial institutions when Risk Capital
Foundation (RCF) was set up, sponsored by the Industrial Finance Corporation of
India (IFCI).
 The Technology Policy statement, 1983 envisaged a positive role for the venture
capital.
 Venture capitalism in India began in 1986 with the start of the economic
liberalization.
 In India, venture capital was brought and established in 1988 when TDICI
(Technology Development and Information Company of India Ltd) was promoted by
ICICI (Industrial Credit and Investment Corporation of India Bank) and UTI (Unit
Trust of India). The first private venture capital fund was sponsored by CFC (Credit
Capital Finance Corporation), and it was promoted by BoI (Bank of India), Asian
Development Bank and the commonwealth development corporation.
 The guidelines vested the requisite powers in the Controller of Capital Issues (CCI).
With the abolition of office of CCI in 1992, its powers were vested in Securities and
Exchange Board of India (SEBI).
 The SEBI Act was amended in 1995 empowering SEBI to register and regulate the
working of venture capital funds.
 The Securities and Exchange Board of India (Venture Capital Funds) Regulations,
1996, known in brief as SEBI (VCF) Regulations, 1996.

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  In India UTI was the first company to start venture scheme under the name of India
Technology Venture Scheme in 1997.
 In 1999 UTI Executive Trustee met the then Chairperson, Technology Development
Board (TDB) and Secretary, TDB and requested TDB‘s participation in Venture
Capital Fund.
What Is Venture Capital?
Venture capital (VC) is a type of private equity financing usually provided to startups
and early-stage enterprises. Usually, venture capital is offered to companies with
considerable potential for expansion and revenue generation, thereby generating the potential
for high returns.
Features of Venture Capital
The essential features of venture capital investment are as follows:
1. New Ventures:
Venture capital typically invests in start-up companies that use cutting-edge
technology to provide improved services or create novel products. Their goal is to achieve
rapid growth and produce significant returns.
2. Hands-on Strategy:
Investors in venture capital take an active interest in the companies they back. They
offer a range of services, including technical skills, loans, coaching, and managerial skills.
However, they do not obtain a majority or control shareholding. They also do not meddle
with daily operations.
3. Fund Representation:
To meet its financial needs, the enterprise or institution develops a variety of sources
of funding and uses them accordingly, avoiding the need to make sudden financial changes.
However, venture capital is a pool of money used to start new businesses.
4. Ongoing Participation:
In addition to investing, venture capitalists mentor their clients‘ businesses by
providing managerial advice and technical expertise.
5. Purpose:
A venture capitalist‘s primary goal is to realize a capital gain at the time of exit. The
basic objective of debt finance is to provide consistent profits. It is a long-term capital
investment made specifically for new small and medium-sized businesses with significant
growth potential.
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6. Liquidity:
The viability of new initiatives is the sole determinant of venture capital investments‘
liquidity. If the company becomes successful, it will be very liquid.
7. Mode of Investment:
This is a form of equity financing. It focuses on companies that are too young to raise
money on the stock market, though. This kind of funding, which ensures that the venture
capitalist‘s investment portfolio displays a consistent yield, might take the form of debt
securities or loan financing.
8. Distribution of an Enterprise’s Profits and Risks:
We are aware that in business, a single person (the entrepreneur) or a group of people
take a risk and profit from it. Venture capitalists collaborate with entrepreneurs on some
ventures as co-promoters, dividing the project‘s earnings and risks by a predetermined ratio.
9. Nature of Firms:
Venture capitalists participate in early-stage small and medium-sized businesses and
industries. They receive finance up until the point at which they can access capital from
commercial financial markets. These businesses are typically tech-focused and inventive.
10. Not Payable Upon Demand:
Unlike repaying loans, venture capital is not payable immediately, although regular
capital is payable immediately and in compliance with the Act‘s stipulations.
Importance of Venture Capital Financing
The following are the importance of venture capital financing.
1. Promotes Entrepreneurs:
Just as a scientist brings out his laboratory findings to reality and makes it
commercially successful, similarly, an entrepreneur converts his technical know-how to a
commercially viable project with the assistance of venture capital institutions.
2. Promotes products:
New products with modern technology become commercially feasible mainly due to
the financial assistance of venture capital institutions.
3. Encourages customers:
The financial institutions provide Venture Capital to their customers not as a mere
financial assistance but more as a package deal which includes assistance in management,
marketing, technical and others.

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4. Brings out latent talent:
While funding entrepreneurs, the venture capital institutions give more thrust to
potential talent of the borrower which helps in the growth of the borrowing concern.
5. Promotes exports:
The Venture capital institution encourages export oriented units because of which
there is more foreign exchange earnings of the country.
6. As Catalyst:
A venture capital institution act as more as a catalyst in improving the financial and
managerial talents of the borrowing concern. The borrowing concerns will be more keen to
become self-dependent and will take necessary measures to repay the loan.
7. Creates more employment opportunities:
By promoting entrepreneurship, venture capital institutions are encouraging self-
employment and this will motivate more educated unemployed to take up new ventures
which have not been attempted so far.
8. Brings financial viability:
Through their assistance, the venture capital institutions not only improve the
borrowing concern but create a situation whereby they can raise their own capital through the
capital market. In the process they strengthen the capital market also.
9. Helps technological growth:
Modern technology will be put to use in the country when financial institutions
encourage business ventures with new technology.
10. Helps sick companies:
Many sick companies are able to turn around after getting proper nursing from the
venture capital institutions.
11. Helps development of backward areas:
By promoting industries in backward areas, venture capital institutions are responsible
for the development of the backward regions and human resources.
12. Helps growth of economy:
By promoting new entrepreneurs and by reviving sick units, a fillip is given to the
economic growth. There will be increase in the production of consumer goods which
improves the standard of living of the people.

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Advantages of Venture Capital
1. Access to Funding
One of the most significant advantages of venture capital is access to funding.
Entrepreneurs with innovative ideas may have trouble finding traditional financing, but
venture capitalists are willing to take a risk on unproven ideas.
2. Business Expertise
Venture capitalists often bring more than just money to the table. They can provide
valuable business expertise and connections to help a startup grow and succeed.
3. Long-Term Support
Venture capitalists typically provide long-term support to their portfolio companies.
This support can include additional funding, guidance, and access to a network of resources.
4. Reduced Risk
While venture capital is a riskier form of financing than traditional loans, it can also
reduce the risk for entrepreneurs. Venture capitalists benefit from the startup's success; they
may be more willing to work with entrepreneurs through difficult times.
5. Marketing and Publicity
Venture capitalists can help their portfolio companies gain exposure and publicity
through their networks and connections.
Disadvantages of Venture Capital
1. Dilution of Control
The primary drawback of venture capital is the dilution of control. Entrepreneurs may
have to give up a significant percentage of their company to secure funding from venture
capitalists.
2. Pressure to Succeed
Venture capitalists expect a high return on their investment and may pressure the
startup to succeed quickly. Therefore, it can be stressful for entrepreneurs and lead to short-
term decision-making.
3. Time-Consuming
Securing venture capital can be time-consuming and distract entrepreneurs from other
critical aspects of their business.
4. High-cost
Venture capital is an expensive form of financing. Entrepreneurs may have to pay
higher interest rates or give up a larger percentage of their company in exchange for funding.

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5. Limited Options
Venture capital is not an option for all businesses. Venture capitalists are often
looking for high-growth startups with innovative ideas and may not be interested in more
traditional businesses.
Stages of venture capital or Phases of Venture Capital or Types of Venture Capital

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I. Early Stage Financing
1. The Seed Capital
Seed means – Beginning stage
Capital means – money required at the very beginning of a business
Seed Capital is the initial amount of money an entrepreneur uses to start a business. This
money comes from family, friends, early shareholders. Funding amounts in the seed
stage are generally small, and are largely used for things like marketing
research, product development, and business expansion, with the goal of creating
a prototype to attract additional investors in later funding rounds.
2. The Startup Stage
In the startup stage, companies have typically completed research and
development and devised a business plan, and are now ready to begin advertising
and marketing their product or service to potential customers. Typically, the
company has a prototype to show investors, but has not yet sold any products. At
this stage, businesses need a larger infusion of cash to fine tune their products
and services, expand their personnel, and conducting any remaining research
necessary to support an official business launch.
3. Second Round Finance
Generally, second-round financing will come from investors including angel investors
or a venture capital firm. The financing right before the expansion will also help a business
secure a business bank loan because its balance sheet will look a lot better with the increased
funding. This will give them more bartering power when they attempt to obtain a loan. The
loan will be used to further expand the company. There are two main stages of second-round
financing.
a) There is a series ―A‖ round which includes the funding for marketing and
personnel.
b) Then there is the series ―B‖ round which is the funding needed to develop
strategic partnerships within the specific market.

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II. Later Stage Financing
1. Development Capital
Often referred to as growth funding, development capital is, at its heart, funding
provided to a business to allow it to grow and develop. This growth can be achieved through
a variety of strategies. These include buy and build, developing new services, and domestic
or international expansion, among many others.
2. The Expansion Stage
Also commonly referred to as the second or third stages, the expansion
stage is when the company is seeing exponential growth and needs additional
funding to keep up with the demands. Because the business likely already has a
commercially viable product and is starting to see some profitability, venture
capital funding in the emerging stage is largely used to grow the business even
further through market expansion and product diversification.
3. Buyout
A buyout refers to an investment transaction where one party acquires control of a company,
either through an outright purchase or by obtaining a controlling equity interest (at least 51%
of the company‘s voting shares). Usually, a buyout also includes the purchase of the
target‘s outstanding debt, which is also known as assumed debt by the acquirer.
4. Replacement Capital:
Purchase of existing shares in a company from another private equity investment
organization or from another shareholder or shareholders. A major part of investment by
venture capitalists is to purchase the existing shares of owners. This may be due to a variety
of reasons including personal need of finance, conflict in the family, or need for association
of a well-known name.
5. Turnaround
A turnaround is the financial recovery of a poorly performing company, economy, or
individual. Turnarounds are important as they mark a period of improvement while bringing
stability to an entity's future.

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Venture Capital Assistance Scheme - Introduction
 The Venture Capital Assistance Scheme is one of the best efforts of the Indian
government to promote agricultural entrepreneurship in India.
 It is provided by SFAC (Small Farmer‘s Agribusiness consortium) to assist agri
preneurs to make investments in setting up agribusiness projects.
 It is a kind of financial support given in the form of interest-free loans to small
farmers, self-help groups, or any of the proprietary firms.
 It is the best financing option to meet the shortfall in the capital requirement for the
implementation of the project.
Objectives of the Scheme

1) To support the entrepreneurs in setting up an agribusiness venture which is approved

by the banks, financial institutions regulated by the RBI to help farmers, producer
groups, and agriculture graduates to participate in the value chain through the Project
Development Facility.
2) To strengthen the previous stages of state and central SFAC.
3) To promote training and visits of agri-entrepreneurs in setting up agribusiness
projects.
4) To provide assured markets to the producers to increase rural income and
employment.
5) To assist the backward linkages of agribusiness projects with producers.

Features of the Scheme

The features of the venture capital assistance scheme are as follows:
1) The venture capital will be provided only for the projects qualified by the banks/
financial institution funding the project.
2) As per the repayment schedule, the venture capital has to be repaid to the SFAC
within the stipulated period.
3) The SFAC will provide the venture capital to the agri-business projects in the form of
soft loans.

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 Eligibility Criteria
The following are the entities specified to avail the loan from the SFAC.
1) Individual
2) Farmers
3) Producer group
4) Partnership Firm
5) Self Help Groups
6) Company
7) Agripreneuers
8) Agri-export zones units
9) Agricultural graduates

Criteria for Assistance of Venture Capital in India

In India, venture capital firms and investors typically consider several criteria when
assessing potential investment opportunities. These criteria help them evaluate the viability,
growth potential and overall attractiveness of startups or companies seeking funding. Here
are some common criteria for assistance of venture capital in India:
1. Market Potential: Venture capitalists assess the market size, growth rate, and dynamics of
the industry or sector the startup operates in. They look for large and rapidly growing markets
with potential for significant returns on investment.
2. Business Model: VCs evaluate the startup's business model to ensure it is scalable,
sustainable, and has a clear path to monetization. They look for innovative approaches that
solve significant problems or address unmet needs in the market.
3. Team: The quality and experience of the startup's founders and management team are crucial
factors. VCs assess the team's expertise, track record, and ability to execute the business plan
effectively.
4. Product/Technology: VCs look for startups with unique and differentiated products or
technologies that offer a competitive advantage. They assess the innovation, scalability, and
potential market fit of the product or technology.
5. Traction: Evidence of traction, such as customer acquisition, revenue growth, or user
engagement, is important. VCs want to see that the startup has achieved significant
milestones and is gaining market traction.

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6. Scalability: Venture capitalists look for startups with the potential for rapid growth and
scalability. They assess factors such as the ability to expand into new markets, leverage
technology, and achieve economies of scale.
7. Market Fit: VCs evaluate the startup's product-market fit, assessing how well the product or
service meets the needs of its target customers and how it differentiates from competitors.
8. Exit Potential: VCs consider the potential exit opportunities for their investment, such as
acquisition by a larger company or an initial public offering (IPO). They assess the startup's
attractiveness to potential acquirers or public market investors.
9. Regulatory and Legal Compliance: VCs ensure that the startup complies with relevant
regulatory and legal requirements. They assess the risks associated with regulatory
compliance and any potential legal issues.
10. Alignment with Investment Thesis: Venture capital firms have specific investment theses,
sector preferences, and stage preferences. Startups need to align with the VC's focus areas
and investment criteria to be considered for funding.
These criteria vary among venture capital firms and investors, and startups should tailor their
pitch and business plan to address these factors when seeking venture capital assistance in
India.

Schemes of Venture Capital in India

Venture capital in India typically operates through various schemes and structures tailored to
the needs of both investors and startups. Here are some common schemes or structures used
in venture capital investment in India:
1. Early-stage Venture Capital: This scheme focuses on providing capital to startups in their
early stages of development. Investors typically take higher risks in exchange for potential
high returns. These investments are usually made in exchange for equity or convertible debt.
2. Seed Funding: Seed funding is the earliest stage of venture capital financing. It provides
capital to startups to help them with product development, market research, and initial
operations. Seed funding may come from individual angel investors, specialized seed funds,
or early-stage venture capital firms.

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3. Angel Investors: Angel investors are affluent individuals who provide capital for startups in
exchange for ownership equity or convertible debt. They often invest in early-stage startups
and provide not only funding but also mentorship and expertise.
4. Venture Capital Funds: Venture capital funds pool money from various investors, such as
high-net-worth individuals, corporations, and institutional investors, and invest this capital in
startups and emerging companies with high growth potential. These funds may focus on
specific sectors, stages of growth, or geographical regions.
5. Corporate Venture Capital (CVC): Corporate venture capital involves investments made
by established corporations in startup companies that align with their strategic interests.
Corporations may set up dedicated venture capital arms or invest directly in startups that offer
synergies with their existing business operations.
6. Government-backed Venture Capital Funds: In India, the government also plays a role in
fostering entrepreneurship and innovation by setting up venture capital funds or providing
financial support to existing funds. These government-backed funds aim to promote the
growth of startups, particularly in sectors of strategic importance.
7. Venture Debt: Venture debt provides startups with debt financing in addition to or instead of
equity financing. This type of financing is structured as loans or lines of credit and is often
used to supplement equity financing or extend the cash runway of startups without diluting
ownership stakes.
8. Accelerators and Incubators: Accelerators and incubators provide startups with funding,
mentorship, office space, and other resources in exchange for equity or fees. While not
strictly venture capital funds, they play a significant role in supporting early-stage startups
and preparing them for subsequent rounds of financing.
9. Convertible Notes and SAFE (Simple Agreement for Future Equity): These are
alternative instruments used for early-stage financing, especially in cases where the valuation
of the startup is uncertain. Convertible notes and SAFE agreements allow investors to provide
funding to startups in exchange for the right to convert their investment into equity at a later
financing round, typically at a discount.

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 Guidelines of Venture Capital in India
These schemes and structures form the backbone of venture capital investment in
India, providing crucial funding and support to fuel the growth of startups and innovative
businesses across various sectors. Venture capital in India is governed by various guidelines
and regulations set forth by regulatory authorities such as the Securities and Exchange Board
of India (SEBI) and the Reserve Bank of India (RBI). Here are some key guidelines and
regulations relevant to venture capital in India:
1. SEBI (Alternative Investment Funds) Regulations, 2012: These regulations govern the
establishment and operation of Alternative Investment Funds (AIFs), including venture
capital funds, in India. AIFs are privately pooled investment funds that collect funds from
investors for investing in accordance with a defined investment policy.
2. Foreign Exchange Management Act (FEMA): The RBI regulates foreign investments in
India under FEMA guidelines. Foreign investors looking to invest in Indian venture capital
funds need to comply with FEMA regulations regarding investment limits, reporting
requirements, and repatriation of funds.
3. Investment Restrictions and Eligibility Criteria: SEBI regulations prescribe certain
eligibility criteria for venture capital funds, including minimum investment size, maximum
exposure limits to individual investee companies, and restrictions on investments in certain
sectors such as real estate and capital markets.
4. Fundraising and Disclosure Requirements: Venture capital funds are required to adhere to
fundraising regulations prescribed by SEBI, which include disclosure requirements,
restrictions on solicitation of funds, and compliance with anti-money laundering (AML) and
know your customer (KYC) norms.
5. Investment and Exit Norms: SEBI regulations specify the permissible investment avenues
for venture capital funds, including equity, equity-linked instruments, and certain debt
instruments of unlisted companies. Additionally, these regulations outline exit options
available to venture capital funds, such as initial public offerings (IPOs), strategic sales, or
secondary market transactions.
6. Reporting and Compliance: Venture capital funds are required to submit periodic reports
and disclosures to SEBI and other regulatory authorities, including details of investments,
financial statements, and compliance with regulatory norms.

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7. Taxation: Taxation of venture capital investments in India is governed by the Income Tax
Act, which includes provisions related to capital gains tax, withholding tax on distributions to
investors, and tax incentives for certain types of investments, such as investments in eligible
startups under the Startup India initiative.
8. Startup India Initiative: The Government of India has launched the Startup India
initiative to promote and support startups in the country. This initiative includes various
incentives and benefits for startups, such as tax exemptions, easier compliance requirements,
and access to funding through government-backed schemes and funds.
It's important for venture capital funds and investors to stay updated with the latest
regulations and guidelines issued by regulatory authorities in India to ensure compliance and
mitigate regulatory risks associated with venture capital investments.
Is this conversation helpful so far?

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