Entrepreneurship Lesson 5: Financing the Venture PDF

ENTREP LESSON 5 2. BONDS FINANCING THE VENTURE These are forms of indebtedness of the issuing company that promises a fixed amount of CAPITAL REQUIREMENTS...

ENTREP LESSON 5 2. BONDS FINANCING THE VENTURE These are forms of indebtedness of the issuing company that promises a fixed amount of CAPITAL REQUIREMENTS interest to the bondholders upon maturity or From an entrepreneur’s viewpoint, capital is call by its holders. not all about or does not necessarily mean money. In fact, some entrepreneurs consider 3. LONG-TERM COMMERCIAL PAPERS idea an innovative idea as a form of capital that LCPs are commercial documents issued by is much more precious than money. large companies with credible track records. CAPITAL REQUIREMENTS SHORT-TERM CREDITORS From financial viewpoint, capital comes in Short-term creditors take the form of financiers monetary terms and in three forms as follows: on a short-term basis lasting to one year or less. In some cases, they include fund 1. FIXED CAPITAL providers who may not demand voluminous It refers to the money needed to purchase documents like business plans or feasibility fixed assets or capital goods such as buildings, studies. These creditors can serve as a stand- machinery, and office equipment. by credit facility to the entrepreneur. 2. WORKING CAPITAL TYPES OF CREDITORS It is needed to fund the day-to-day operations 1. COMMERCIAL BANKS of the business and represents the money or Are duty-bound to provide both short-term and hard cash to support its normal short-term long-term financing to any viable business operations. Example utilities, stock/inventory, project. and payroll. 2. MERCHANDISE SUPPLIERS 3. GROWTH CAPITAL The company’s inventory or stock can be It is not related to daily or seasonal procured either through cash or credit terms. requirements for funds of the business. Instead, growth capital requirements are needed when 3. CREDIT CARD COMPANIES an existing business is set to expand, diversify, Credit card is the most convenient , yet the or change its directions. most expensive loans term you can find in town and it’s actually one of the most OWNERS’ EQUITY overlooked avenues in obtaining start-up In a corporation, the contribution of the owner capital. to the capital of the business is called Equity. It is also oftentimes referred to as the ownership 4. CAPITAL EQUIPMENT SUPPLIERS in the corporation and the holders of stock In their desire to sell equipment, suppliers will certificates are called stockholders. often make every favorable term available even to new companies. This is possible LONG-TERM BORROWINGS because the equipment itself secures the loan. Long-term, as well as medium-term creditors, refer to organizations whose main businesses 5. LEASING COMPANIES are generally meant for providing such form of They make possible the procurement of capital financial assistance. Generally, they include items or equipment for the company. This banks and mortgage houses that provide funds arrangement, however, can work the other way or capital whose payment are made on a long- around if the entrepreneur holds the design of term basis. the capital equipment. THREE TYPES OF FUND SOURCES 6. RECEIVABLE FACTORS 1. MORTGAGE There are many specialized organizations like A mortgage takes the form of fund generation credit and collection companies of even by way of pledging a designated property as individuals who take the risk of buying security or collateral for the loan. receivables at discounted rates. 7. DEFERRAL OF PAYABLES IN GENERAL When the company is in a difficult situation or when the money position of the company is tight, most companies lag behind in their payment of bills and loans. OTHER SOURCES 1. LENDING INVESTORS 2. GOVERNMENT INSTITUTIONS 3. NON-GOVERNMENT ORGANIZATIONS (NGO) 4. POLITICAL SOURCES 5. FRIEND AND RELATIVES 6. EMPLOYEES 7. PURCHASE ORDER FINANCING 8. USURERS THE C’s of CREDIT To be able to avail the financing from the bank or any other commercial sources, prospective entrepreneurs must be aware that lenders or creditors apply the basic principles of the so- called C’s of credit. 1. COLLATERAL All formal sources of funding generally require a collateral in the form of real state, equipment, or any other form of easily saleable property. 2. CAPACITY This refers to the capacity of the entrepreneur or borrower to pay for the loan. 3. CHARACTER This is more of the personal standing of the entrepreneur or borrower in his community. 4. CONTRACT Each loan or borrowing transaction has to have contract or agreement defining the obligations of the contracting parties. 5. CONDITIONS Forming part of the major content of the contract are the terms and conditions set forth in the contract or agreement. The conditions essentially refers to the terms or mode of payments, interest rates, penalties, and sanctions in case of default, as well as provisions for settlement of disputes as necessary.