Business Ventures PDF - GEB 2092/GDB 2093

GEB 2092/GDB 2093 Business Ventures FROM THE BUSINESS PLAN TO FUNDING THE VENTURE Sources of Capital GEB 2092/ GDB 2093 GEB 2092/GDB 2093Business Ventures All information in these slides are for the sole purpose of teaching and learning....

GEB 2092/GDB 2093 Business Ventures FROM THE BUSINESS PLAN TO FUNDING THE VENTURE Sources of Capital GEB 2092/ GDB 2093 GEB 2092/GDB 2093Business Ventures All information in these slides are for the sole purpose of teaching and learning. All audio and video materials used are for the sole purpose of teaching and learning.  CONTENT FROM THE BUSINESS PLAN TO FUNDING THE VENTURE Sources of Capital GEB 2092/ GDB 2093 Sources of Capital Debt or Equity Financing Debt financing - Obtaining borrowed funds for the company. - Requires the entrepreneur to pay back the amount of funds borrowed as well as a fee expressed in terms of interest rate. - For short term financing (less than one year), the money is usually used to provide working capital to finance inventory, accounts receivable, or the operating of the business. - Long-term debt ( lasting more than one year), is frequently used to purchase some assets, land, or building, with part of the value of the asset (usually 50 to 80 percent of the total value) being used as collateral for the long-term loan. GEB 2092/ GDB 2093 Sources of Capital Debt or Equity Financing Equity financing - Obtaining funds for the company in exchange for ownership. - Does not require collateral and offers the investor some form of ownership position in the venture. - The investor shares in the profits of the venture, as well as any disposition of its assets on a pro rata basis based on the percentage of the business owned. - Usually the entrepreneur meets financial needs by employing a combination of debt and equity financing. GEB 2092/ GDB 2093 Sources of Capital Internal or External Funds Internally generated funds can come from several sources within the company: profits, sales of assets, reduction in working capital, extended payment terms, and accounts receivable. A short-term. Internal source of funds can be obtained by reducing short-term assets: inventory, cash and other working-capital items. GEB 2092/ GDB 2093 Sources of Capital Internal or External Funds GEB 2092/ GDB 2093 Sources of Capital Personal Funds The typical sources of personal funds include savings, life insurance, or mortgage on a house or car. Personal funds are essential in attracting outside funding, particularly form banks, private investors, and venture capitalist. The level of commitment id reflected in the percentage of total assets available that the entrepreneur has committed, not necessarily in the amount of money committed. GEB 2092/ GDB 2093 Sources of Capital Family and Friends Family and friends are more likely to invest due to their relationship with the entrepreneur. Family and friends provide a small amount of equity funding, for new ventures, reflecting in part the small amount of capital needed for most new ventures. Although the amount of money provided may be small, if it is in the form of equity financing, the family members or friends then have an ownership position in the venture and all rights and privileges of that position. In order to avoid problems in the future, the entrepreneur must present the positive and negative aspects and the nature of the risks of the investment opportunity to try to minimize the negative impact on the relationship with family and friend should problems occur. GEB 2092/ GDB 2093 Sources of Capital Commercial Banks Commercial banks are by far the source of short-term funds most frequently used by the entrepreneur when collateral is available. The funds provided are in the form of debt financing and, as, such, require some tangible guaranty or collateral. Types of Bank Loans Asset base for loan – tangible collateral valued at more than the amount of money borrowed. - Accounts Receivable Loans – for creditworthy customers, a bank may finance up to 80 percent of the value of their accounts receivable. - Inventory Loans – inventory is another of the firm’s assets that is often a basis for a loan, particularly when the inventory is liquid and can be easily sold. GEB 2092/ GDB 2093 Sources of Capital Types of Bank Loans (cont.) - Equipment Loans – equipment can be used to secure longer-term financing, usually on a 3-to 10-year basis. - Real Estate Loans – real estate is also frequently used in asset-based financing. GEB 2092/ GDB 2093 Sources of Capital Commercial Banks Cash Flow Financing Conventional bank loan is a standard way banks lend money to companies. - Instalment Loans – instalment loans can be obtained by a venture with a track record of sales and profits. - Straight Commercial Loans – a hybrid of the instalment loan is the straight commercial loans, by which funds are advanced to the company for 30 to 90 days. - Long-term Loans – when a longer time period for use of the money is required, long-term loans are used. - Character Loans – when the business itself does not have the assets to support a loan, the entrepreneur may need a character (personal) loan. GEB 2092/ GDB 2093 Sources of Capital Bank Lending Decisions The bank lending decision are made according to the five Cs of lending: - Character - Capacity - Capital - Collateral - Conditions Some of the concerns of the loan officer and the loan committee can be reduced by providing a good loan application. Generally, the entrepreneur should borrow the maximum amount that can possibly be repaid as long as the prevailing interest rates and the terms, conditions, and restrictions of the loan are satisfactory. GEB 2092/ GDB 2093  THE END FROM THE BUSINESS PLAN TO FUNDING THE VENTURE Sources of Capital GEB 2092/ GDB 2093