ENT 51112 Programs & Policies on Enterprise Development PDF

ENT 51112 PROGRAMS & POLICIES ON ENTERPRISE DEVELOPMENT Financing Business Ventures & Getting Credits [email protected] Ariel Francisco Faraon Ariel Francisco Faraon  SESSION OBJECTIVES At the end of the session, the students will be able to: a) disting...

ENT 51112 PROGRAMS & POLICIES ON ENTERPRISE DEVELOPMENT Financing Business Ventures & Getting Credits [email protected] Ariel Francisco Faraon Ariel Francisco Faraon  SESSION OBJECTIVES At the end of the session, the students will be able to: a) distinguish among the five forms of entrepreneurial capital; b) identify sources of financing for entrepreneurial ventures in the Philippines, their advantages and disadvantages; c) differentiate equity from debt financing and explain their advantages and disadvantages d) Identify the different government financing programs for enterprise development, their scope and limitations and the ways how to access them; and e) Identify start-up business loans in the Philippines and how to access them. [email protected] Ariel Francisco Faraon Ariel Francisco Faraon Sources of Financing for Entrepreneurial Ventures [email protected] Ariel Francisco Faraon Ariel Francisco Faraon  Forms of Entrepreneurial Capital There are five types of capital from which we derive the goods and services we need to improve the quality of our lives: financial, manufactured capital, human, social and natural Human Capital: Talents and capabilities that individuals contribute to the process of production Economic Capital: Economic capital is composed of both finance capital (cash, money) and manufacturing capital (manufacturing plants and other physical assets Social Capital” Connections within and between social networks as well as connections among individuals Manufactured Capital: Physical means of production that can be acquired or found in nature, e.g., tools, clothing, shelter, irrigation systems, dams, roads, boats, ports and factories. Natural Capital: Stock of natural ecosystems that yields a flow of goods and services into the future. Recognizes the essential relationship between the Earth’s valuable resources and the business environment. [email protected] Ariel Francisco Faraon Ariel Francisco Faraon But first… Why business needs financing? Where does the money for new start-ups usually come from? What about later as the company grows? Can you think of some creative ways to raise funds? Has anyone ever used crowdfunding? Have you ever tried to raise money from your family? [email protected] Ariel Francisco Faraon Ariel Francisco Faraon  Why business needs finance? Finance refers to sources of money for a business. Finance is life blood of business; It is a pre-requisite to mobilize resources for organizing industrial production. It is also vital for trade: retail, wholesale, export, import; Firms need finance to: - Start up a business, e.g., pay for premises, new equipment and advertising. - Run the business, e.g., having enough cash to pay staff wages and suppliers on time. - Expand the business, eg having funds to pay for a new branch in a different city or country. New businesses find it difficult to raise finance because they usually have just a few customers and many competitors. Lenders are put off by the risk that the start-up may fail. If that happens, the owners may be unable to repay borrowed money. [email protected] Ariel Francisco Faraon Ariel Francisco Faraon  Why business needs finance? Finance refers to sources of money for a business. Finance is life blood of business; It is a pre-requisite to mobilize resources for organizing industrial production. It is also vital for trade: retail, wholesale, export, import; Firms need finance to: - Start up a business, e.g., pay for premises, new equipment and advertising. - Run the business, e.g., having enough cash to pay staff wages and suppliers on time. - Expand the business, eg having funds to pay for a new branch in a different city or country. New businesses find it difficult to raise finance because they usually have just a few customers and many competitors. Lenders are put off by the risk that the start-up may fail. If that happens, the owners may be unable to repay borrowed money. [email protected] Ariel Francisco Faraon Ariel Francisco Faraon  The times, they are a-changin’ Funding in the new era is not simply be thrown at companies in the hope that one in 10 is wildly successful. Today, funding goes only to entrepreneurs who thoroughly understand their customers’ requirements and who can ensure the funder from the beginning that every product delivers on its value. [email protected] Ariel Francisco Faraon Ariel Francisco Faraon  Capital Requirements A business project need to have substantial start-up capital requirement, but one does not have to be a millionaire to start an entrepreneurial business endeavor. 1. Fixed Capital: refers to the money needed to purchase fixed assets or capital goods. 2. Working Capital: is needed to fund the day- to-day operations of the business. 3. Growth Capital: is not related to daily or seasonal requirements for funds of the business. It is needed when an existing business is set to expand, diversity, or change its directions. [email protected] Ariel Francisco Faraon Ariel Francisco Faraon  Estimating Financial Funds Step 1: Startup Expenses Startup expenses are one-time expenses that occur before you open your doors for business and start selling your product or service. Expenses are money you pay for services, like legal expenses, or design services, or rent — intangible things that you don't get to keep. Expenses reduce your taxable income, but cannot be depreciated over time. After startup, expenses are accounted for in your profit-and-loss table. Legal: Money you spent on legal fees for establishing the business's legal structure, as well as fees for registrations, local licenses, trademark research, etc., belong in your startup expenses. Logo design: While paying for a logo is not essential, a lot of startups want to establish a professional-looking logo before they start. If you paid a professional for this design work, enter those costs here. Initial website design: You're probably going to continue to revise and review the design of your website as the business grows, but that would be an ongoing expense. What you spend before startup belongs here. Insurance: Include any insurance costs you incur before the launch date of your business. This includes insurance on your store/office itself, as well as inventory, vehicles, etc. Payroll: If you have employees on the clock before you open your doors, their pay belongs in your startup expenses. Payroll becomes an item in your profit-and-loss table later, but pre-startup, it's a startup expense. [email protected] Ariel Francisco Faraon Ariel Francisco Faraon  Estimating Financial Funds Rent/Security deposit: Most businesses secure a location and have to start paying for it before their startup date. If you put down a security deposit and paid rent prior to day one of your business, that is considered a startup expense. Computer and office equipment: You might think that these should be considered assets, but the IRS allows startups to designate a limited amount of office equipment as expenses. Currently, you can deduct around $100k in this category. Training: If you took courses or attended workshops to get prepared for startup, (or you sent employees for training) the costs for that training should be listed in your expenses. Pre-opening marketing: You want people to know that you're about to launch your business. Any advertising and marketing expenses should be included here — things like radio or print ads, brochures, or "Grand Opening" signs and announcements. Office supplies: Chances are you needed to stock up on items you'll need to support your office. Your paper, pens, personalized stationary, even your paper clips should be listed as startup expenses. Consultants: Many businesses hire consultants to assist when starting a business. Whether they consulted on site location, helped you learn more about your competition, or advised you on your IT needs, the costs associated with their services are startup expenses. Misc and others: There most likely were other expenses associated with your startup that you should make sure to include. Did you pay for electricity to your storefront or office, or for phone service before you launched? Maybe you had software developed or had other unique needs. [email protected] Ariel Francisco Faraon Ariel Francisco Faraon  Estimating Financial Funds Step 2: Startup Asset Assets are tangible things like tables and chairs, land, and equipment, and even sometimes intangible things like intellectual property, that you own. Unlike expenses, assets are not deductible against income. But assets whose value declines over time can be depreciated. After startup, you will list your assets on your balance sheet. Cash in the bank: In addition to cash that you will use to cover your ongoing monthly expenses (which we will calculate in the next step), you might want some additional cash in your bank account when you open your doors for business. This money could be used simply as a safety net or to cover any unforeseen expenses during the first few months of business. Starting inventory: If you sell products, you should include the money spent on the inventory you have at the start of business. If you are starting a service- based business with no inventory, feel free to leave a zero in this field. Other current assets: These are normally things like supplies, napkins, and other small items that last less than a year but are still considered assets. You might make a list elsewhere and put the total here. The standard is different for every business. Office furniture: Chairs, tables, shelves, small appliances all fall into this category. If you purchased the furniture prior to start up, it should be included here. Signage: This includes the sign outside in the parking lot, for instance, as well as in-store signs that you'll use to announce sale items or to categorize your inventory. Leasehold improvements: Here's where you'll account for money spent on fixing up the place after you find it and rent it but before your starting date. Remember to include things like new lighting, paint, repaving the parking lot, etc. Plant and equipment: The costs here will vary greatly depending on the type of business you are starting. Generally considered long-term or fixed assets, these are items that depreciate over more than five years and are likely to last at least that long. Land: The land your company owns is also considered a long-term asset. You want to list the purchase price, not the current value, because you're reflecting the money you've actually put into this particular asset. Other assets: The list of what could be considered "other assets" is long. Intellectual property, which might be hard to quantify, fixtures for you store or office, or equipment that went beyond what the IRS allowed you to consider expenses can be entered here. [email protected] Ariel Francisco Faraon Ariel Francisco Faraon  Estimating Financial Funds Step 3: Recurring Costs One of the hardest estimates is the cash you'll need to have in the bank as a war chest, or cash reserve, to keep the business afloat during the normal lean months, just after the start, before sales grow enough to support the normal cash outlays. There's no magic formula. You may have heard some time-worn guidelines, like the one that says you should have six months' worth of expenses stored up before you start. This isn't a bad idea, but realistically, can you afford it? Can you raise the money? Are you able to get some early sales, to offset expenses? Can you get to a monthly break-even point sooner, or will it take you longer? In the end, what you need is a reasonable estimated guess. Monthly Expenses: Running monthly expenses, often called the burn rate. This is at best an estimated guess. Rent Utilities Payroll Inventory Marketing: All other How many months? Number of months: How many months of expenses do you think you'll need? (Set an estimate here; be conservative, and remember, there is no absolute right or wrong answer) [email protected] Ariel Francisco Faraon Ariel Francisco Faraon Estimating Financial Funds Your startup costs are the sum of what you will spend as startup expenses, plus what you need to spend to buy startup assets, plus the cash you need to have in the bank the day you open your business. What's next? The next step in starting your business, once you have figured out how much it will cost, is to figure out where the money will come from. [email protected] Ariel Francisco Faraon Ariel Francisco Faraon Sources of Financial Capital Where to find start-up capital? What type of capital to use and when? Entrepreneurs have a number of sources of financial capital as their ventures develop. The level of risk and the stage of the firm’s development help determine the appropriate source of financing for entrepreneurial ventures. [email protected] Ariel Francisco Faraon Ariel Francisco Faraon Sources of Financial Capital Entrepreneurs have a number of sources of financial capital as their ventures develop. Notice that the level of risk and the stage of the firm’s development should determine the appropriate source of financing for the entrepreneurial ventures. [email protected] Ariel Francisco Faraon Ariel Francisco Faraon Bootstrapping Bootstrapping, operating a business as frugally as possible and cutting all unnecessary expenses, such as borrowing, leasing, and partnering to acquire resources. Bootstrapping involves: 1. hiring as few employees as possible 2. leasing anything you can 3. being creative Bootstrapping entrepreneurs can also ask suppliers to allow for longer payments terms, ask customers to pay in advance, or sell their accounts receivable to an agent who handles an entrepreneur’s accounts receivable for a fee [email protected] Ariel Francisco Faraon Ariel Francisco Faraon  Bootstrapping Advantages Disadvantages No time waste in hunting Not always practical in investment case of manufacturing & Full control on the company importing Not answerable to investors It can take much longer to grow a company without Quick management of money investment Creative problem solving You will likely not be More focus on customers not earning any money for investors quite a while Efficient Product development You can easily end up in a and marketing lot of debt If you survive bootstrapping you will have a strong, lean, efficient, customer focused company [email protected] Ariel Francisco Faraon Ariel Francisco Faraon  Bootstrapping Advantages Disadvantages No time waste in hunting Not always practical in investment case of manufacturing & Full control on the company importing Not answerable to investors It can take much longer to grow a company without Quick management of money investment Creative problem solving You will likely not be More focus on customers not earning any money for investors quite a while Efficient Product development You can easily end up in a and marketing lot of debt If you survive bootstrapping you will have a strong, lean, efficient, customer focused company [email protected] Ariel Francisco Faraon Ariel Francisco Faraon How to get money from your family Have you heard of the ‘kitchen table pitch’? Know their motivations. Debt is better than equity for relatives Do follow-up with a written memo. Try to treat them as if they were strangers. Have a lawyer prepare the promissory note. Try to avoid a repayment schedule. Don’t give voting stock. [email protected] Ariel Francisco Faraon Ariel Francisco Faraon Informal investing Informal investors are often from the 4Fs: –Friends, family, founders and ‘foolhardy investors’ –Neighbors, work colleagues and even strangers Expected returns are affected by altruism –Strangers expect higher returns than parents –Men expect higher returns than women –Older persons expect lower returns than younger –Entrepreneurs expect higher returns than non- entrepreneurs [email protected] Ariel Francisco Faraon Ariel Francisco Faraon Venture Capital They provide capital to young businesses in exchange for an ownership share of the business Venture capitalists can provide: –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 regulations. [email protected] Ariel Francisco Faraon Ariel Francisco Faraon Angel Investors Angel investors are individuals or groups of high- net-worth individuals who provide capital to startups and early-stage companies in exchange for equity ownership or convertible debt. These investors are typically entrepreneurs or experienced business professionals who not only contribute their financial resources but also provide valuable guidance, industry expertise, and networking opportunities to the companies they invest in. Angel investors play a crucial role in funding and nurturing early-stage businesses, helping them grow and succeed. [email protected] Ariel Francisco Faraon Ariel Francisco Faraon Government Institutions There are various government grants and programs available to support startup entrepreneurs and small businesses. These grants often aim to encourage innovation, job creation, and economic development. However, the availability of grants and eligibility criteria can change over time, so it's essential to verify the most up-to- date information from relevant government agencies. [email protected] Ariel Francisco Faraon Ariel Francisco Faraon