|




› Three reasons to raise money

› Cash flow challenges, capital investment,
lengthy product development cycles
› Cash Flow: Credit to customers, new
equipment purchases, lag b/w spending
to generate revenue and earning income
from the firmƞs operations
 
|

› Credit to customers, new equipment

purchases, lag b/w spending to generate
revenue and earning income from the
firmƞs operations
› Training of employees, build plant &
machinary
Produopm

› 0eet obligations of lengthy product
development cycles
› Developing electronic game takes two
years and $4 million
 p 

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› £uying property, constructing buildings.

Investing in other capital projects,
 |



› Involves getting loan or selling bonds
› £ut difficult for new venture to sell a bond
› Two common types of loans
› Single--purpose loan ƛ specific amount of
Single
money is borrowed that must be repaid in a
fixed time with interest
› Second ƠA line of Creditơ ƛ A borrowing cap is
established. £orrower can use the credit at
his/her own discretion
› £enefits: ownership is not surrendered
› Interest payments are tax deductible
 |



› It involves an interest-
interest-bearing
instrument, usually a loan, the payment
of which is only indirectly related to sales
and profits.
› Short
Short--term debt is used to provide
working capital.
› Long term debt (lasting more than a
year) is frequently used to purchase
some asset, with part of the value of the
asset being used as collateral.
 ‰ u |




› It offers the investor some form of ownership

position in the venture.
› The investor shares in the profits of the
venture.
› Equity funding provides the basis for debt
financing, which makes up the capital
structure of the venture.
 ‰ u |




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› They invest their personal capital directly in

start--ups
start
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› The money that is invested by venture-
venture-capital
firms in start-
start-ups and small businesses with
exceptional growth potential
› Venture capital firms provide funding to other
firms
› Venture capital firms are limited partnerships of
money managers who raise money in Ơfundsơ to
invest in start-
start-ups and growing firms.
› The funds are raised from wealthy individuals,
pensions plans, foreign investors etc
 

› A lease is a written agreement
› Owner of a piece of property allows an individual
or business to use the property for a specified
period of time in exchange fro payments.
› Equipment/Asset is acquired with little money
invested
› In the end: Can stop use of asset, purchase at
fair market value, or renew the lease
› Leasing as an alternative of debt or equity
financing
› Leasing is always most expensive that purchase
of an asset


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› The most often used type of funds is internally
generated funds.
› These funds come from sources within the company,
such as profits, sale of assets, reduction in working
capital, and accounts receivable.
› Sometimes little-
little-used assets can be sold or leased.
› Assets, whenever possible, should be on a rental basis,
not an ownership basis.
› One short-
short-term internal source of funds is reducing
short--term assets, or through extended payments from
short
suppliers.
› £y collecting accounts receivable more quickly.
 ‰
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› ‰
r
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d ord is that part of
the total debt in a company that is owed
to creditors outside the company
› It comes from the following sources:
(1) Friends & Family
(2) Government
(3) £anks
(4) Other financial institutes
 Pr o
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› Few new ventures are started without
the personal funds of the entrepreneur.
› In terms of cost and control these are
the least expensive.
› They are essential in attracting outside
funding.
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› After the entrepreneur, family and friends are
the next most common source of capital.
› Family and friends provide a small amount of
equity funding for new ventures.
› It is relatively easy to obtain money from family
and friends.
› However, the amount of money provided may
be small.
› If it is in the form of equity funding, the family
member or friend has an ownership position in
the venture.
 Guidelines for Entrepreneur
› To avoid potential future problems, the entrepreneur
must present the positive and negative aspects and the
nature of the risks of the investment.
› To minimize any future problems, keep the business
arrangements strictly business oriented.
› Any loan should specify the rate of interest and the
proposed repayment schedule
› The entrepreneur should settle everything up front and
in writing.
› A formal agreement specifying details of the funding
helps avoid future problems.
 ‰



› Commercial banks are the most
frequently used source of short-
short-term
funds.
› This is debt financing and requires some
collateral, some asset with value.
› This collateral can be business assets,
personal assets, or the assets of the
cosigner of the note.
 9p o 

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› Accounts receivable provide a good basis for a loan,
especially if the customer base is creditworthy.
› A bank may finance up to 80% of the value of the
accounts receivable.
› A factoring arrangement can be developed whereby
the factor (bank) actually buys the ac­counts and
collects the money.
› If any of the receivables are not collectible, the factor
sustains the loss, not the business.
› The cost of factoring is higher than the cost of
securing a loan against the accounts receivable.
 9p o 

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› A factoring arrangement can be developed
whereby the factor (bank) actually buys the
ac­counts and collects the money.
› Outright sale of account receivables to a bank
or finance company.
› The purchaser takes all credit and collection
risk
› The proceeds received by the selling company
are equal to the face value of the receivables
less the commission charge (2-
(2-4 %)
 9p o 

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› Inventory is often a basis for a loan, particularly when
inventory is liquid and can be sold easily.
› Finished goods inventory can be financed up to 50%
of value.
› Trust receipts are a type of inventory loan used to
finance floor plans of retailers such as auto dealers.
› The bank advances a large percentage of the invoice
price of the goods and is paid a pro rate basis as the
inventory is sold.
 9p o 

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› Trust receipts are a type of inventory loan
used to finance floor plans of retailers such as
auto dealers.
› The bank advances a large percentage of the
invoice price of the goods and is paid a pro
rate basis as the inventory is sold.
› The creditor has title to given goods but
releases them to borrower to sell on the
creditorƞs behalf.
› As goods are sold, the borrower remits the
funds to the lender
 9p o 

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› Equipment can be used to secure longer
term financing up to 3 to 10 years.
› When new equipment is bought, 50 to
80% of value can be financed.
› In sale-
sale-leaseback financing the
entrepreneur "sells" the equipment to a
lender and then leases it back.
 9p o 

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They are easily obtained to finance
› Land
› Plant
› £uilding
usually up to 75% of value.
  |ow|




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› Installment loans can be obtained by a
going venture with a track record of sales
and profits.
› These funds are used to cover working
capital needs, usually for 30 to 40 days.
  |ow|



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dƕ
Straight commercial loans
› In this hybrid of the installment loan,
funds are advanced to the company for 30
to 90 days.
› These self-
self-liquidating loans are used for
seasonal financing.
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› These loans are usually only available to
more mature companies.
› Funds are available for up to 10 years with
the debt repaid according to a fixed
interest and principle schedule.
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› When the business does not have assets
to support a loan, the entrepreneur may
need a character loan.
› These loans must have assets of an
individual pledged as collateral, or have
the loan cosigned by another

‰
‰





‰
‰




› £anks are very cautious in lending

money, particularly to new ventures.
› Commercial loan decisions are made only
after the loan officer does a careful
review of the borrower.
› Decisions are made based on
quantifiable and subjective judgments.

‰
‰




› £ank lending decisions can be summarized by

the five Cƞs
1. Character
2. Capacity
3. Capital
4. Collateral
5. Conditions

 


‰

 


9 9

 

› When an entrepreneur is unable to secure a
regular commercial bank loan, an alternative is
a Small £usiness Administration (S£A)
Guaranty Loanº
Loanº
› The S£A guarantees that 80% of the loan will
be repaid to the bank by the S£A if the
company canƞt pay.
› This allows the bank to make loans that have
higher risks.
› This procedure is the same as for securing a
bank loan, except that government forms and
documentation are required.

 


‰

 


9 9
 

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› £oth long and short-
short-term loans can be guaranteed by the S£AS£Aº
º
› A maximum loan period of 15 years on existing buildings and 20
years on new con­struction can be obtained.
› For inventory, equipment, or working capital, a maximum of 10
years is available.
› Once the application has been filled out, it usually is processed
within 15 days.
› There are additional reporting requirements beyond those for a
conventional bank loan.
› Since there is no difference in interest rates charged between
conventional bank loans and S£AS£A--guaranteed loans, a commercial
bank loan is usually better.
› A good banking relationship is very valuable as the venture
grows.

 


‰

 


9 9
 

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› For most S£A loans, there is no limit to the amount of
loan money requested, but there is practical limit of $1
million.
› The vast majority of small businesses are eligible for
financial assistance from the S£A.
› As defined by the Small £usiness Act, a small business
is independently owned and operated and not
dominant in its field of operation.
› The size limits of a small business vary from industry
to industry.
› The proceeds of the loans can be used for almost any
business purpose.
› The interest rates are negotiated between the
entrepreneur and the bank, but there are subject to
S£A maximums.

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› This method of financing provides funds from

inventors looking for tax shelters.
› A typical R&D partnership arrangement is
established with a sponsoring company
developing the technology with funds being
provided by a limited partnership of individual
investors.
› Research and development limited
partnerships are particularly good when the
project involves a high degree of risk
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› Contract
› Sponsoring Company
› Limited Partners
› General Partners
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Produr
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contract is established and the money
invested
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The company performs the actual research
‰


In which with both parties reaping the benefits
  m dPr
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› It provides the needed funds with a
minimum of equity dilution
› The sponsoring companyƞs financial
statements are strengthened
› It reduces the risk
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› There is considerable time and money
involved.
› 0ost R&D limited partnerships are
unsuccessful.
› The restrictions placed on the technology
may be substantial.
› The exit from the partnership may be
too complex.
 S£IR Grant Program
(Small £usiness Innovation Research)

S£IR is a competitive grant program

provides $1billion per year to small
businesses for early stage and
Development projects
 S£IR Grant Program
(Small £usiness Investment Research)

The S£IR grant program has three phases.

› P 
 awards are up to $50,000 for six months of
P 
awards
feasibility--related experimental or theoretical research.
feasibility
› P 

is the principal R&D effort. Phase II awards

are up to $500,000 for 24 months of further research
and development. The money is to be used to develop
prototype products. In
› P 

funds from other sources, such as the private

sector or regular government contracts, are needed to
commercialize the developed technologies.
 P
 9‰P ‰‰9
› It includes the investors from family, friends or
wealthy individuals
› An investor usually takes an equity position
and can influence the nature of the business to
an extent.
› The investorsƞ degree of involvement is
important for the entrepreneur to consider.
› Some investors want to be actively involved in
the business, and others are more passive.
 Pu  ºPr  r

Pu  r
 

  Sell stock to the Public
› To fund current and future operations
› To raise a firmƞs profile making it easier to
attract high-
high-quality customers, alliance
partners, and employees
› Serve as liquidity event to provides a
mechanism for the stockholders (investors
also) to cash out their investments
› Creates another form of currency that can be
used to grow the company by paying for it
with stock rather than cash
 Pu  ºPr  r

Pu  r
 

  Sell stock to the Public
› Public offerings involve much time and expense.
(Needs Underwriter or agent for issuing stocks ƛ
Investment £ank)
› £ank serves as advocate/advisor
› £ank and Firm must agree upon the amount of capital
needed, the type of stocks to be issued, the price of
the stock, cost of issuing stock to the firm
› Preliminary Prospectus issued ƛdescribes offerings the
general public
› SEC approval ƛ Final prospectus is issued
 Pu  ºPr  r


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  Sell stock to the Public
› Registering the securities with the Securities
and Exchange Commission (SEC) requires a
number of reporting procedures once the firm
has gone public.
› This public process was established to protect
unsophisticated investors.
 Pu  ºPr  r

Pr  r

› It is faster and less costly than other funding.
› Direct ale of an issue of securities to a large
institutional investor
› When private public offering ƛ Not public
offering take place
› These sophisticated investors still need access
to material information about the company.
› No prospectus is required
 u o


Regulation D contains:
› A number of broad provisions designed
to simplify private offerings.
› General definitions of what constitutes a
private offering.
› Specific operating rules-
rules-Rule 504, Rule
505, and Rule 506.
 u o

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› Under Rule 504 a company can sell up to $500,000 of
securities to any number of investors in any 12-
12-month
period.
u
› Rule 505 permits the sale of $5 million of unregistered
securities in the private offering in any 12-
12-month
period.
› These can be sold to any 35 investors, and an
unlimited number of accredited investors
u
› Rule 506 allows an issuing company to sell an
unlimited amount of securities to 35 investors and an
unlimited number of accredited investors
 u o

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 or
It includes:
(I) Institutional investors
(ii) Investors who purchase over $150,000 of
the issuerƞs securities.
(iii) Investors whose net worth is $1 million.
(iv) Investors with incomes in excess of $200,000
in the last two years.
(v) Directors, officers, and general partners of
the issuing company.

9
9 P|
 


› It is hard for new firm to generate funds

› It is the use of creativity, ingenuity, and
any means possible to obtain resources
other than borrowing money or raising
capital from traditional sources

9
9 P|
 


› Example: 0inimizing personal expenses

and putting all profits back into the
business
› Avoiding unnecessary expenses, such as
lavish office space or furniture
› Leasing equipment rather than buying
› Sharing office space or employees with
other business

9
9 P|
 

It is important when capital is very expensive
o o u dp 
› It takes time to rise outside capital when the
company can least afford the time.
› Outside capital often decreases a firmƞs drive
to make money.
› The availability of capital increases the impulse
to spend.
› Outside capital can decrease the companyƞs
flexibility and hamper the creativity of the
entrepreneur.
p 
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 P

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› In Punjab PSIC was established in 1972 as an
autonomous body for the promotion and development
of the small-
small-scale industries in the province.
› The PSIC covers the critical areas of investment
promotion and provision of credits for setting up new
industries and modernization of the existing ones.
› It also promotes the common facility center,
technology transfer, guidance, handicrafts
development and design facilities.
 Pu

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It provides following type of services:

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› PSIC is providing two types of loans to its clients,
working capital and capital investment loans



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› PSIC has developed 14 industrial estates in various
areas of the Punjab

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› PSIC has also launched ƠRural Industrialization
Programơ to control unemployment and strengthen
the marginal household income.


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› SSIC was established in 1972

› It has motives to indulge into promotional
activities of small-
small-scale industries in Sindh.
› The objectives of SSIC include financial
assistance, education of craftsman, census and
survey of cottage and small industries,
procurement and distribution of raw materials
to artisans and craftsman.
› SSIC was also involved in the Prime 0inisterƞs
self--employment scheme for the dispersal of
self
the micro credits.


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It provides the following services:

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› The SSIC has established 17 industrial estates in
Sindh.
› Total number of plots developed there are 1938
› There are six different craftsman colonies established
having 92 shops.

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› The SSIC also launched a credit scheme in 88,/89.
› In October 1992, a self-
self-employment scheme was
started for locally manufactured machinery

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It provides the following services:

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› SID£ has established carpet centers in five cities of
NWFP
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dodPro
› SID£ has also launched various women development
programs

du r ‰ 

› SID£ has established 9 industrial estates
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› SID£ is also managing different credit schemes for
small industries
  roro 

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› The directorate of industries was formed
in 1976
› It looks after all the promotional
schemes for S0Es.
› Further more, the directorate is also
involved in providing various kinds of
advisory and consultancy services.

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› It was established in 1972 as a federal entity.
› The main aim was at the time of establishment,
to assist small entrepreneurs for self-
self-
employment and setting up cottage industry.
› The mark up was kept lower; the majority
lending was towards self-
self-employment leaving
only 2% for small industries.
  ruur


|
› The management took over in year 2000 and
restructured the entire corporation.
› The restructuring was based on the facts that
S£FC has deviated from its main aim resulting in
a weak balance sheet.
› There were 1400 employees at 96 branches.
The internal control and management was
highly ineffective with poor quality of human
resources, poor work ethics, poor infrastructure
and non-
non-existence of training and development
culture.
  o
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› The Regional Development Finance Corporation was
established in 1985
› The main objective are to promote the industrialization
of the less developed areas of the country.
› RDFC is a multi-
multi-product financial institution.
› It participates in money market, capital market and
micro credit delivery.
› £esides financing of medium to large sized industrial
concerns RDFC has been involved in disbursing micro
and small sized loans.


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› ID£P is Pakistanƞs one of the oldest development
financing institution
› Its primary objective is to extend term finance
for investment in the manufacturing sectors in
the economy.
› As a part of its services the bank offers business
development assistance through providing
information on potential small-
small-scale investment
projects. In this regard numerous pre-
pre-feasibility
studies have been developed for identification of
viable sub sectors.