Module-7:·FINANCING THE NEW VENTURE·

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Sources of capital: Generally raising money to launch an enterprise has been challenge and very difficult for the entrepreneurs. Generally every entrepreneur gets money or raise money from the following ways.... Banks Financial institutions Equity share capital IPO Loans Debentures

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Even though entrepreneur has number of ways for getting finance but choosing the best is again challenge and he should approach the a financial adviser Every entrepreneur has to identify his future commitments and then estimate the finance He must maintain a good network with his creditors, investors, lenders, customers and etc An entrepreneur should have basic knowledge on all goods, services, and all activities Finally every entrepreneur should follow business plan for survival of him and his company

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EQUITY FINANCING (or) EQUITY SHARE CAPITAL
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Equity share represents the ownership position in a company The holders of these shares are called equity share holders They are legal owners of the company Their capital is permanent and has no maturity date They will get dividend/return/benefit Their dividend in return is not fixed; hence it is called ¶variable income security·
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Features of equity shares
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1.Right to income:Every equity share holder has Right to income They had claim on residual income on company Residual income refers after paying :----Taxes Expenses Interest charges Preference dividend

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2.Claim on assets:Every equity share holders has paid last after claim of debt holders and preference share holders paid They don·t have any right on company assets 3.Right to control:They have legal power to choosing/appointing the board of directors They have power to replace the board of director 4.Voting rights:Every equity share holder has right to vote for electing board of directors Every equity share holder can participate in the vital affair of election of board of directors 5.Limited liability:Every equity share holders has limited liability with the company because once he paid investment back then no liability.

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Advantages of equity capital(for company)

No compulsion to pay dividend for equity share holders € Permanent capital (no maturity date) € Cushion to lenders (easily borrowing capital) € Tax exemption (dividends are free from tax)
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Dis -Advantages of equity capital(for company)
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Cost: - company has to pay high dividend to share holders Risk: - From Investors Company get problem for not paid dividend at the time of windup of company Earnings dilution: - Dilutes the existing share holders after issuing new shares which reduces EPS value Product ownership dilution:-Purchasing the new shares from new share holders makes that product dilutes and reduces the EPS of that product.

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DEBT - FINANCING
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Debt:Debt means borrowing money from outside source under predetermined terms and conditions Debt is a good option to raise money to grow your business without given up? Every company it may be small or big or medium it requires surplus finance for expansion of company activities But some large scale companies prefer equities than debts

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PROS OF DEBT FINANCING OPTION
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Autonomy: - every company has Personal independence for raising finance with minimum terms and conditions Tax benefits: - interest payments on loans are deducted from the company·s income before calculation tax Discipline: - generally investors think managers in the company is working hard for them but actually managers are working for achieving profits

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CONS OF DEBT FINANCING OPTION
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Repayment (sometimes it·s difficult to repay at the time of bankruptcy) Interest rates (some times high interest rates) Collaterals and guarantees (submission of ownership documents for loan, debts)

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€

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TYPES OF DEBT FINANCING
Working capital loan:€ This is short term loan for raising finance € This is mainly raised for
Purchase of Raw materials Payment of wages Administrative expenses Financing inventories Managing internal cash flows Supporting supply chains Funding production Marketing operations

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Overdraft:€ This is also one type of short term debt option € Company have a current account for this facility € Bank gives certain limit of money for overdrew Factoring:€ The bank buys the customer·s account receivables € The operation of trade is done at domestic and international € The entire responsibility took over the bank € Company will rotate the entire money

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Commercial papers(CP):€ It is short term money market debt € Issued by the companies € Issued at a discount on face value (actual value of bond) € They are purchased by banks, indusial, and mutual funds Term loans:€ Loan particularly taken for particular period of time € They are mainly taken for buying companies assets and grow business Syndicated loans:€ They are large loans € They are raised by big corporations € Issued by the group of banks € Their aim to acquire domestic and international companies

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Project finance:€ They are raised in large € They are used for long term infrastructure projects € Requires huge amounts € Raised in the form of tenders € They are very sensitive and including of formalities Debentures:€ They are long debt instrument € Issued by the company by acknowledgement € It will be repay in future at pre determined interest rate

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Inter-corporate deposits:€ This is fund issued by one surplus corporate € And it is received by one more corporate need of funds € This type of funds are very securitized Personal loans:€ Issued by the banks, financial institutions € Received by entrepreneurs € For the purpose of any type of business € The business may be big or small banks approves € Issued with full of security only

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Internal Funds (or) External Funds:€ Any new business can be financed by internal or external funds € Internal Funds:- the funds which are generated by the all ready existing business or profits or benefits of any company are known as internal funds and example is----Retained earnings:€ Generated inside the company € They generated through trading/business € They are not distributed as dividends € They are holding for future expansion € Contribution from equity share holders in some cases

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Advantages of retained earnings:Advantages of retained earnings:€ Readily availability € Cheaper than external equity € No ownership dilution (no partnership with share holders) € Positive connotation (An idea that is implied or suggested)

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Dis-Advantages of retained earnings:€ Limited finance € High opportunity cost (sacrifice done by share holders) € Sale of assets (for emergency) € Cash

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External Funds:The Funds which are generated by the external sources are known as external funds, they are as follows:€ Equity shares € Preference shares € Debentures € Loans € Options € Bonds
€
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Funding from Banks and financial institutions:-

Bank: - Bank is financial institution that accepts deposits and channels the money into lending activities Functions:€ Generates loans € Accepts deposits € Accepts overdrafts € Issues loan with high safe guard and high security
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Financial institutions
Finance is a blood for any business € It generates every activity inherited in the business € Finance is mandatory for any type of business like it may be small, medium, and large € Every entrepreneur needs money to start business € It is very important to run an enterprise
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Some financial institutions
SIDBI (Small industries development bank of India ) € Commercial banks € Regional rural banks € Co-operative banks € NABARD (national bank for agriculture and rural development)
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Schemes and types of loans for ENTREPRENEURS
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Traders easy loan scheme SSI loans Business current accounts Open term loan Retail trade Doctor plus SME credit plus Small business credit card Auto clean Charter for SSI Artisan credit card School plus Flexi loan

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Entrepreneur schemes:- (by SBI Bank) € Term loans € Working capital € Equity fund finance € Stree Shakti package (For Women Entrepreneurs50% of applied) Banks offered loans for entrepreneurs:€ SBI € HSBC € ICICI € Bank of Baroda € Oriental Bank of Commerce € And some of the banks
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Private placement
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Some of the private agencies they are willing to give loans for entrepreneurs with their frame rule, terms, and conditions and mutual agreements along with high security and high interest rates. Regulation D (Rules 505 & 506) This memorandum describes legal registration for private placement of for selling stocks in common manner like IPO·s Generally their loans are as follows:High expensive in interest Limited time period Lack of disclosures More terms and conditions

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Types of investors
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Equity share holders Debt holders Preference share holders General public

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Private offerings
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This is offering from private companies Under the regulation D (504) Deals with-Small Company Offering Registration (SCOR) Also known as ¶Uniform Limited Offering Registration· Created and framed in 1980 in US Created for small companies for selling their stock to public No need to submit or register or satisfying the SEBI guidelines
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Boot strap Financing
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Boot strap financing is defined as building a business out of little of nothing with no or minimum outside capital. Boot strap finance is generated from friends, relatives, and private funds

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Boot strap - Advantages:€ In-expensive € High returns € No interest € High worth
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Boot strap -Dis-Advantages:€ This type of financing is unnecessary for entrepreneur € It is not enough funds for business € Risk is inherited in this type of finance with relationships

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Sources of bootstrap financing
Trade credit (30, 60, 90days from lenders) € Factoring (selling accounts receivables to buyer) € Real estate (leasing of any asset)
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Equipment suppliers (equipment loan from manufactures)

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Venture Capital
Definition:-venture capital is thought of as, ´The early stage financing of new and young enterprises seeking to grow rapidlyµ (OR) Venture capital is also described as un-secured risk financing. € Venture capital represents financial investment in a highly risky proposition made in the hope of earning a high rate of return. € The first stage of investment (not considering future )
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Features of venture capital
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Invested in high technology or innovative goods/services High risky investment Chances of failures Returns of venture capital are much liquidated They are long term investments Venture capital firm (VCF) encourages nature VCF helps newly upcoming entrepreneurs
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Stages of venture financing
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Early Stage- Venture Financing

Seed capital stage € Start up stage € First round finance € Second round finance
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Later Stage -venture Financing
Expansion finance € Replacement finance € Turn around € Bridge finance € Buy outs € Buy in
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Seed capital stage Start up stage First round finance Second round finance Expansion finance Replacement finance

Invested Small amount- to prove concept Initial product development & marketing Ready to manufacture a product Working capital required for manufacturing Funds required for expansion Untagged high interest funds/services-replace with best sourcespositive cash flows Breakeven point of profits and sales Bridge between public and venture investors Take over ownership of; of corporations and companies

Turn around Bridge finance Buy outs

Buy in

Stock up on to keep for future use or sale

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Sources of venture capital
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EXIM Bank IDBI Venture Fund ICICI Venture Funds Management Company Limited IFCI Venture Capital Funds Limited GVFL (Gujarat Venture Finance Limited) SIDBI Venture Fund UTI Venture Funds Management Company Canara Bank Venture Capital Fund PIVF (Punjab InfoTech Venture Fund)

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Forein Direct Investment (FDI)
Definition: - FDI is investment of foreign assets into domestic structures, equipment, and organizations
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Features:Foreign country is directly investing in India Not invested in stock market It is very hot investment for India It is life blood for economic development Mainly issued for small, big manufacturing industries Increases countries trade balance Increases labour standards & skills Transportation of new technology Importing of new innovative ideas Improves infrastructure Improves general business climate

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FDI Key sectors
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Hotel & tourism Private sector banking Insurance sector Telecommunication Trading (exports/logistics) Power Drugs & pharmaceuticals Roads, highways, ports & harbours Pollution control and Management Call centres in India BPO·s

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