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MKTM033 The Entrepreneurship

Report
WK10 - Sources of Funding
Workshop 3
Wednesday 4th March 2015

Dr. Jack Lovell

You & your


business idea
Market segments & value
proposition

Resour
ces
availab
le

Marketi
ng
Strateg
y

Operatio
ns plan

Risk &
strate
gic
option
s
Financial plan

Resour
ces
needed

Sources and Uses of Finance


Source of finance

Equity

Long
and
medium
term

Personal, family and friends


investment
Angel finance
Venture finance

Fixed assets

Long and medium term loans

Land and buildings


Plant, machinery and
equipment
Vehicles
Computers and furniture

Personal, family and friends


Bank

Permanent working
capital

Lease and hire purchase


Crowdfunding (equity or loan)

Short
term

Use of finance

Bank overdraft
Short term loans
Personal, family and friends
Bank

Stock
Debtors (net creditors)

Seasonal fluctuations
in working capital
Stock
Debtors (net creditors)

Term Loans:
Personal, Family and Friends
Advantages

Disadvantages

Security unlikely to be
required
Loans may be
informal capital
repaid as and when
cash flow improves
Interest payments may
not be required or may
be deferred

Interest payments may


be required
Can strain
relationships if
repayments not made
as expected
If business fails, family
and friends may suffer
Family and friends may
interfere in the
business

Bank Overdraft
Advantages
Flexible once agreed,
available on demand
Can be cheap if you dip
into and out of it you
only pay interest when
you use it
Good solution to shortterm financing needs

Disadvantages
Repayable on demand
Interest rate is variable
Can be expensive if in
permanent overdraft as
interest rate is usually
higher than on term
loans
Usually secured against
business assets and
can be refused because
of lack of security
Personal guarantee may
then be required

Term Loans:
Banks and Crowdfunding
Advantages

Disadvantages

Term of loan is fixed


usually not repayable
on bank demand
Capital repayments
fixed and known in
advance
Interest rate can vary
or be fixed and is
usually lower than an
overdraft

Usually secured
against business or
personal assets
Can be refused
because of lack of
security
Requires good cash
flow to pay interest and
repay capital
Crowdfunding website
charge fee based on
funds raised

Asset Security Values


Asset

% value that can be borrowed

Freehold land and


buildings

70%

Long leasehold

60%

Specialist plant
and machinery

510%

100% through leasing

Non-specialist
plant & machinery

30%

100% through leasing

Debtors

3050% Depends on age and quality

Stock

25%

Depends on age and quality

Banks Considerations

Loan Purpose, amount and


repayment terms
Financial Cash flow,
breakeven and gearing
Personal Character and
ability

What Worries Banks


Frequent excesses
Development of hard-core borrowing
Lack of financial information
Your availability
Inability to meet forecasts
Continuing losses, declining margins
and rapidly decreasing/increasing sales

Lease Finance
Advantages
Guarantees not
required security is
on assets purchased

Disadvantages
Expensive compared
to rates of interest
charged on loans
Requires adequate
cash flow to meet
regular payments

Equity Finance:
Personal, Family and Friends
Advantages

Disadvantages

Good, secure long term Dividends may be


expected
finance
Selling shares to
No interest or capital
outsiders dilutes stake
repayment
in the business and
Can be used to lever
may lead to loss of
further loan finance
control
Outsiders providing
equity may want to
interfere

What Investors are Looking for


Risk and return Typically 30%
to 60% p.a. return (equivalent
to multiplying their investment
by 4 to 6 times in 5 years)
Exit route (liquidity event)
Typically liquidation of
investment within 5 to 10 years

Exit Opportunities
Buy-back
Trade sale
Management buy-out
Management buy-in
Second-stage finance
Stock market floatation

Crowdfunding Equity
Advantages

Disadvantages

Good, secure long term Investors will need to


see an exit route
finance
(liquidity event)
Can be used to lever
Dividends may be
further loan finance
expected
Small amounts of
Crowdfunding website
equity available
charge fee based on
Based on business
funds raised
plan not security

Angel Finance
Advantages

Disadvantages

Good, secure long term


finance
Can be used to lever
further loan finance
Small amounts of
equity available
Based on business
plan not security
Investment usually for
5 to 10 years
Hands-on expertise

Only really available to


growth businesses
A proportion of profits
and capital growth go
to Angels
Dividends may be
expected
Angels will sell on their
investment in the
future
Angels may be seen as
interfering

Venture Finance
Advantages

Disadvantages

Good, secure long term


finance
Larger amounts often
used as second stage
Based on business plan
not security
Usually for 5 to 10 years
Can offer longer-term
strategic advice but no
day-to-day involvement
Aid with additional loans
No interest or capital
repayments

Only for businesses


with very significant
growth prospects n
A proportion of profits
and capital growth go
to investor
Dividends expected
Investors will want to
sell-on in the future
usually through a
stock market floatation
Requires very detailed
information disclosure
Takes time