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
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
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
