Oct 14 ecd lecture 5 financing the business i(1)
- 1. ENTERPRISE CREATION & DEVELOPMENT Lecture 5 Financing the Business 1 Mr Nicholas Tan Tian Leng (nicholas@np.edu.sg) ECD Oct 14 / Lecture 5 / ttl 1
- 2. Lecture objectives Sources of financing Types of financing ◦ Equity financing ◦ Debt financing How different finance options will affect profitability/cash flow 2ECD Oct 14 / Lecture 5 / ttl
- 3. Recommended reading • Donald F. Kuratko ENTREPRENEURSHIP – THEORY, PROCESS AND PRACTICE, 9th Edition, CENGAGE, Chp 7,9 & 15 • Justin G. Longenecker, Carlos W. Moore, J. William Petty and Leslie E. Patch, SMALL BUSINESS MANAGEMENT – AN ENTREPRENEURIAL EMPHASIS, International Edition, Thomson South-Western, Chp 12 3ECD Oct 14 / Lecture 5 / ttl
- 4. After deciding on how to start your business, & which business structure to use (in the last lecture), you need to ask: 1. Where are you getting the money for your new ventures? 2. What about later? We will go through the different Financing options in this lecture. 4ECD Oct 14 / Lecture 5 / ttl
- 5. Sources of funding 5 Dependent on: - Level of risk - Stage of firm’s development ECD Oct 14 / Lecture 5 / ttl
- 6. Types of financing Equity financing Debt financing 6ECD Oct 14 / Lecture 5 / ttl
- 7. Equity financing Money invested in the venture with no legal obligation for entrepreneurs to repay the principal amount or pay interest on it. But entrepreneurs will need to share ownership & profits with the funding source 7ECD Oct 14 / Lecture 5 / ttl
- 8. Sources of equity financing a) Personal savings b) Informal investors c) Public offerings d) Private placements e) Venture capitalists f) Angel investors 8ECD Oct 14 / Lecture 5 / ttl
- 9. b) Informal investors Usually ◦ Friends ◦ Families ◦ Colleagues ◦ Strangers ECD Oct 14 / Lecture 5 / ttl 9
- 10. c) Public offerings Initial public offering (IPO) refers to a corporation raising capital through the sale of securities on the public markets. Advantages: ◦ Able to raise huge sums of capital in a short period. ◦ Public market provides liquidity for owners since they can readily sell their shares. ◦ The marketplace puts a value on the company’s shares, which in turns allows value to be placed on the corporation. ◦ The image of a publicly traded corporation is stronger in the eyes of suppliers, financiers & customers. 10ECD Oct 14 / Lecture 5 / ttl
- 11. c) Public offerings Disadvantages: ◦ Costs involved with a public offering are much higher. Eg accounting fees, legal fees, prospectus printing, costs of underwriting shares. ◦ Detailed disclosures of the company’s affairs must be made public. ◦ Paperwork involved with government regulations etc drains a lot of time, energy & money. ◦ Pressure from shareholders could lead to short term views of the company. 11ECD Oct 14 / Lecture 5 / ttl
- 12. d) Private placements Money invested by private investors. May be possible to avoid issuing a prospectus (rules differ from country to country). Suitable for an injection of capital to jump to the next level of growth. And have a proven track record of profitability. 12ECD Oct 14 / Lecture 5 / ttl
- 13. e) Venture capitalists (VCs) Professionals that provide a full range of financial services for new or growing ventures, including: Capital for start–ups and expansion Market research and strategy Management consulting functions Contacts with prospective customers and suppliers Assistance in negotiating technical agreements Help in management and accounting controls Help in employee recruitment Help in risk management Guidance with government regulation ECD Oct 14 / Lecture 5 / ttl 13
- 14. e) Venture capitalists’ objectives Different from other investors VCs will carefully measure both product/service and management Concerned with return on investment (ROI) Returns are expected to be consistently high 14ECD Oct 14 / Lecture 5 / ttl
- 15. e) Evaluating the venture capitalist Don’t hesitate to evaluate the venture capitalist – Does the venture capitalist understand the proposal? – Is the individual familiar with the business? – Is this someone I can work with? ‘You can divorce your spouse, but you can’t divorce your investor’ 15ECD Oct 14 / Lecture 5 / ttl
- 16. More on Venture Capitalists Financing, With Strings Attached (The New York Times) 16ECD Oct 14 / Lecture 5 / ttl
- 17. f) Angel investors An angel investor has already made their money and now seeks out promising young ventures. Currently expecting lower valuations and more control. ECD Oct 14 / Lecture 5 / ttl 17
- 18. f) Angel investors Corporate angels – Senior managers laid off or retired with generous payouts Entrepreneurial angels – Own and operate successful businesses Enthusiast angels – Independently wealthy from success in a business they started Micro-management angels – Attempt to impose their management style Professional angels – Invest in companies with products/services they know 18ECD Oct 14 / Lecture 5 / ttl
- 19. Debt financing • Debt involves borrowing money, with an obligation to pay it back with interest and usually to a deadline or timeline. 19ECD Oct 14 / Lecture 5 / ttl
- 20. Debt financing 1) Commercial banks 2)Trade credit 3) Accounts receivable financing 4) Factoring 5) Hire purchase 6) Finance companies 20ECD Oct 14 / Lecture 5 / ttl
- 21. 1) Commercial banks A major source of small business debt financing. Loans are secured by fixed assets, receivables, inventories, or other assets. Generally require collateral and systematic payments. Not interested in future prospects. 21ECD Oct 14 / Lecture 5 / ttl
- 22. 2) Trade credit ◦ Credit given by suppliers who sell goods on account, usually 30 – 90 days. ◦ Many small, new businesses obtain this credit when no other form of financing is available. ◦ Suppliers typically offer this credit to attract new customers. 22ECD Oct 14 / Lecture 5 / ttl
- 23. 3) Accounts receivable financing Short-term financing that involves the pledge of receivables as a collateral for a loan. Accounts receivable bank loans are made on a discounted value of the receivables pledged. Made by commercial banks. Notification or non-notification plan. 23ECD Oct 14 / Lecture 5 / ttl
- 24. 4) Factoring Sale of a business’s accounts receivables to a factoring company. Usually the factor will buy the client’s receivables outright, without recourse, as soon as the clients creates them by shipment of goods to customers. Common in industries such as textiles, furniture manufacturing, clothing manufacturing, toys, shoes and plastics. 24ECD Oct 14 / Lecture 5 / ttl
- 25. 5) Hire purchase Extended payment scheme entered into between the entrepreneur/hirer and owner (equipment manufacturer or financial institution) Hirer only needs to pay a small deposit up front and then make regular instalment payments Only on final instalment does the hirer acquire ownership 25ECD Oct 14 / Lecture 5 / ttl
- 26. 6) Finance companies Asset-based lenders that lend money against assets such as receivables, inventory and equipment. Often make loans that banks do not. Interest higher than banks. 26ECD Oct 14 / Lecture 5 / ttl
- 27. Equity & debt financing 27ECD Oct 14 / Lecture 5 / ttl