CHAPTER-6

FINANCE
 FINANCE FEASIBILITY STUDY & SOURCES OF CAPITAL

What is business finance:- Business finance refers to Money and Credit employed in
business. Financing is an act of providing funds for business activities. It involves
procurement and utilization of funds so that business firms may be able to execute their
operations efficiently and effectively.

The main characteristics of business finance:-

1.Business finance includes all types of funds used in business.
2. Business finance is needed for all types of business, small or big.
3.The amount of business finance differs from firm to firm depending upon its nature, size .
4.It is concerned with raising of funds from different sources as well as investment of funds
for different purposes.
 FINANCE FEASIBILITY STUDY.
Meaning:-Finance feasibility study is an analysis of viability of a Project idea. It is about whether
one should proceed with the proposed project idea or not.

Finance feasibility study involves the following:--

• Entrepreneur’s personality Traits (strong work ethic, strong people skills, passion, determination,
competitiveness, confidence, and discipline)
• Entrepreneur’s experience
• Product or service characteristics
• Market characteristics
• Financial considerations
• Nature of the venture team.

Q-Briefly explain the significance of Entrepreneurial finance feasibility study?

 WHO IS FUNDING ENTREPRENEURIAL START-UP
COMPANIES?
 ********Sources of Capital for Entrepreneurship.
Q-What are the various sources of Finance for an Entrepreneurship?
(1) Personal funds, family and friends:-
Entrepreneurs rely on various sources of capital to finance their venture, but they, mostly rely on
personal funds which are least expensive in terms of cost and control. Using personal funds is very
important in attracting external financial resources such as banks, private investors, venture
capitalists. Friends and families are another conventional source of fund that is limited and their
expectation of getting back a good return is set in an informal way.

(2)Debt Financing:
Debt financing is obtaining funds for the company from borrowing and paying it back with interest/fee.
When a Firm raises money for working capital or capital expenditures by selling bonds, bills, or notes to
individual and/or institutional investors. In return for lending the money, the individuals or institutions
become creditors and receive a promise that the principal and interest on the debt will be repaid.
The common Debit Finance Sources are;
1.State Financial Corporations (SFCs),
2. Non-banking Finance Corporations (NBFCs).
3. Banks, which includes foreign banks, nationalized banks, private banks, etc
Procedure For Securing Debt Finance:-
1. Drawing up the business plan.
2. Identifying sources of debt finance.
3. Presenting the proposal to the bank.
4. Going for further talks.
5. Working out details.
6. Purpose is significant for the banks.
7. Safety (Collateral, margin money, guarantees etc).
Contd….
7. Profitability (bank).
8. Collateral (inside collateral & outside collateral)
9. Personal Guarantee.
10. Maturity (issuing credit limit).
11. Debt Covenants
12. Menu Pricing.
13. Lending strategies of banks.
(A). Financial statements.
(B). Relationship lending.
© Credit scoring.
 DEBT FINANCING
• Advantages
• No relinquishment of
ownership is required.
• More borrowing allows for
potentially greater return on
equity.
• During periods of low interest
rates, the opportunity cost is
justified since the cost of
borrowing is low.
• Disadvantages
• Regular (monthly) interest payments
are required.
• Continual cash-flow problems can be
intensified because of payback
responsibility.
• Heavy use of debt can inhibit growth
and development.
(3). EQUITY FINANCING
Definition:-
• Equity financing is the process of raising capital through the sale of shares in an
enterprise. Equity financing essentially refers to the sale of an ownership interest to raise
funds for business purposes.
• Equity financing is defined as getting funds for the company in exchange for ownership.
Nature:
• Many entrepreneurs prefer to raise money through equity rather than debt. It is appealing,
since it feels like free money at the start up. Furthermore, there is no need for collateral and
usually no obligation to repayment.

Characteristics:-
• Money invested in the venture with no legal obligation for entrepreneurs to repay the
principal amount or pay interest on it.
© 2012 CENGAGE LEARNING. ALL RIGHTS RESERVED.
• Funding sources: public offering and private placement.
Sources of Equity Financing
The following are the sources of Equity Financing:-

(1) Initial Public Offering (IPO)

IPO, is the first sale of the stock to the public by an entrepreneur and equity owners, usually
small and young companies, through offer and sell of some parts of the company in public
market via registration statement with the security Exchange Board of India. IPO has three
main advantages, which are obtaining new equity capital, being provided with more liquidity
and consequently realizing an enhanced valuation and increasing the ability of the company
for getting future funds.

(2) Business Angels (informal risk capital):-

The Business Angels or private investors are those who can be wealthy friends and families, or
another individual. Business angels are those who invest their capital in fresh ventures and
are commonly entrepreneurs who have liquidated their company and are willing to invest
their money or are the retired high executives of the large companies.
(4). Venture Capitalists (VCs)
Venture Capital is the money provided by professionals called venture capitalists (VCs) who invest alongside
management in new, and rapidly growing companies that have the potential to develop into significant economic
contributors.
Venture Capital is closely associated with the technologically intensive ventures, like Biotech, IT, alternate energy,
and other technologically-intensive ventures.
Professionally managed VC firms generally are Private partnerships or Trust managing the funds from Public
/Private /Foundations/Corporations/Wealthy individual/Foreign investors and Venture Capitalist themselves.

****What are the Key differences between Business Angels and Venture Capitalist?
• Own money (BA) vs. other people’s money (VC)
• Fun + profit vs. profit
• Lower vs. higher expected IRR( Internal rate of return)
• Very early stage vs. start-up or growth stage
• Longer investment period vs. shorter investment horizon.
(5). Corporate Venture Capital (CVC).
• Corporate venture capital (CVC) is the investment of Corporate funds directly in external startup
companies. CVC is the "practice where a large firm takes an equity stake in a small but innovative or
specialist firm, to which it may also provide management and marketing expertise.

Objective of CVC:-“Strategic and Financial Objectives.

(a) Strategically driven CVC investments are made primarily to increase, directly or indirectly, the
sales and profits of the incumbent firm’s business. A well-established firm making a strategic CVC
investment seeks to identify and exploit synergies between itself and the new venture.
(B)The next objective is to exploit the potential for additional growth within the parent firm. For
instance, investing firms may want to obtain a window on new technologies, to enter new markets,
to identify acquisition targets and/or to access new resources.
Examples of CVCs include Google Ventures and Intel Capital.
Explain the differences between VC & CVC?
 PUBLIC OFFERINGS

• Advantages
• Size of capital amount
• Liquidity
• Value
• Image

• Disadvantages
• Costs
• Disclosure
• Requirements
• Shareholder pressure
© 2012 CENGAGE LEARNING. ALL RIGHTS RESERVED.