Chapter 6
Chapter 6
Chapter 6
Business Financing
Financial Requirements
It is short-term finance.
Most small firms need working capital to bridge the gap between when
they get paid, and when they have to pay their suppliers and their
overhead costs.
Requirements for this kind of short-term finance will vary considerably by
business type.
Asset Finance
1. Personal saving:
The first place entrepreneurs should take for startup money is in their own pockets.
As a general rule, the entrepreneur should contribute at least 50% of the starting up
capital.
If an entrepreneur is not willing to risk his own money potential investors are not
likely to risk their money in the business either.
2. Friends and relatives:
After emptying their own pockets, entrepreneurs should turn to friends and
relatives who might be willing to invest in the business.
3. Partners:
An entrepreneur can choose to take on a partner to expand the capital formation of
the proposed business.
Source of equity financing Cont’d
I. Commercial banks
by far the most frequently used source for short term debt by the entrepreneur.
Banks focus on a company’s capacity to create positive cash flow because they
know that’s where the money to repay their loan will come from.
Bank Lending Decision: Most bankers refer to the five C’s of credit in making
lending decision.
1. Capital: a small business must have a stable capital base before a bank will
grant a loan.
2. Capacity: The bank must be convinced of the firm’s ability to meet its regular
financial obligations and to repay the bank loan.
3. Collateral: The collateral includes any assets the owner pledges to the bank as
security for repayment of the loan.
Sources of debt Cont’d
VI) Credit unions: Credit unions are non-profit cooperatives that promote savings
and provide credit to their members.
VII) Bonds: A bond is a long term contract in which the issuer, who is the borrower,
agrees to make principal and interest payments on specific date to the holder of
the bond.
VIII) Traditional Sources of Finance: “Idir”, “equib”
Lease Financing
the owner of an asset gives another person, the right to use that asset
against periodical payments.
the important sources of medium- and long-term financing
The owner of the asset is known as lessor and the user is called lessee.
The periodical payment made by the lessee to the lessor is known as lease
rental.
can be classified into two categories - Finance lease and operating lease,
depending upon:
the transfer of risk and rewards to the lessee
the period of lease and
the number of parties to the transaction
Finance Lease
It is the lease where the lessor transfers substantially all the risks and
rewards of ownership of assets to the lessee for lease rentals.
Features of finance lease:
a device that gives the lessee a right to use an asset.
The lease rental charged by the lessor during the primary period of lease is sufficient to
recover his/her investment.
The lease rental for the secondary period is much smaller. This is often known as
peppercorn rental.
Lessee is responsible for the maintenance of asset.
No asset-based risk and rewards are taken by lessor.
Such type of lease is non-cancellable; the lessor’s investment is assured.
Operating Lease
Crowd funding platforms, on the other hand, turns that funnels on-end.
give the entrepreneur a single platform to build, showcase, and share your
pitch resources,
this approach dramatically streamlines the traditional model.
Traditionally, you’d spend months:
sifting through your personal network
vetting potential investors, and
spending your own time and money to get in front of them.
The Benefits of Crowd funding