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Lecture 11 Entrepreneurship

This document discusses various sources of capital for new ventures. It outlines internal sources like profits and reducing working capital as well as external sources such as debt financing through bank loans, equity financing by issuing stock, private placements, and bootstrap financing methods. Debt financing involves borrowing at interest while equity financing trades ownership for funds. The document also notes some problems that can arise with external financing like decreased sales motivation and loss of flexibility.

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Komal Rahim
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89 views20 pages

Lecture 11 Entrepreneurship

This document discusses various sources of capital for new ventures. It outlines internal sources like profits and reducing working capital as well as external sources such as debt financing through bank loans, equity financing by issuing stock, private placements, and bootstrap financing methods. Debt financing involves borrowing at interest while equity financing trades ownership for funds. The document also notes some problems that can arise with external financing like decreased sales motivation and loss of flexibility.

Uploaded by

Komal Rahim
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Entrepreneurship

Lecture 11 – BBA2K19
By: Hassan Ali – Lecturer
Sindh University Campus, Thatta
Entrepreneurship
Chapter - 11

Sources of
Capital
Sources of Capital

Learning Objectives
 Sources of Capital for new ventures
 Debt Financing and Equity Financing
and their sources
 Internal Funds and External Funds
and their sources
 Private Placement and Bootstrapping
Sources of Capital
Sources of Capital for new Ventures
■ One of the most critical problems each entrepreneur faces
is securing financing for the new venture.

■ It is particularly important at the start-


up stage of the new venture.

■ The longer the new venture can operate


without outside capital, the lower the cost
of the capital in terms of interest rates or
equity loss of the company
Sources of Capital
Debt or Equity Financing
Debt Financing – Obtaining borrowed funds for the
company
■ Debt Financing involves an interest-bearing instrument,
usually a loan, the payment of which is only indirectly
related to the sales and the profits of the venture.
■ It is also called asset-based financing and requires that
some asset be used as collateral.
■ Debt Financing requires the entrepreneur to pay back
the amount of funds plus interest
Sources of Capital
Debt or Equity Financing
Debt Financing – Obtaining borrowed funds for the
company

■ If Debt Financing is for less than one year it usually


used for funding working capital requirements.

■ If Debt Financing is long term, it is used for plant


and machinery.

■ Debt Financing is especially attractive when


interest rates are low.
Sources of Capital
Debt or Equity Financing
Equity Financing – Obtaining funds for the company in
exchange for ownership.

Key factors favoring equity financing are:

■ Availability of funds,

■ The Assets of the venture,

■ The Prevailing Interest rates.


Sources of Capital
Debt or Equity Financing
Equity Financing – Obtaining funds for the company in
exchange for ownership.
■ All ventures will have some equity as all ventures
are owned by someone.
■ All financing requires some level of equity;
amount will vary by nature and size of venture.
■ Offers investor some form of ownership position.
■ Does not require collateral.
Sources of Capital
Internal or External Funds
Internally generated funds are most frequently
employed; sources include:

► Profits

► Sale of Assets

► Reduction in Working Capital

► Accounts Receivable
Sources of Capital
Internal or External Funds
Short-term internal source of funds:
 Reducing short-term assets:
– Inventory,
– Cash,
– Working-capital items.

 Extended payment terms from


suppliers.
Sources of Capital
Internal or External Funds
Sources of External Funds
■ Sources of External Funds must be evaluated on the
following bases:

● Costs involved

● Amount of Company control lost

● Length of Time Funds are available


Sources of Capital
Internal or External Funds
Types of External Funds available are:
● Personal Funds
● Family and Friends
● Suppliers and Trade-credits
● Commercial Banks
● Venture Capital
● Leasing/Modarba/Islamic Financing Companies
Sources of Capital
Internal or External Funds
Commercial Banks usually lend short-term loans that
includes:
● Accounts receivable loans
● Inventory Loans
● Equipment loans
● Real Estate Loans
● Installment Loans
● Straight Commercial Loans
Sources of Capital
Internal or External Funds
Problems With External Financing
■ Firstly takes time to process and this may lead to
entrepreneur distraction.
■ Secondly if often decreases a firm’s drive for sales
and profits.
■ Thirdly it increases impulse to spend.
■ Fourthly decrease flexibility
■ Finally can lead to short-term profit pressures
Sources of Capital
Private Placement
A private placement is a sale of stock shares or bonds to
pre-selected investors and institutions rather than on the
open market.

• It is an alternative to an initial
public offering (IPO) for a
company seeking to raise
capital for expansion.
Sources of Capital
Private Placement
Types of Investors
 Investor can influence nature
and direction of the business.

 May be involved in the business


operation.

 Entrepreneur needs to consider


degree of involvement.
Sources of Capital
Private Placement
Private Offerings
 A formalized method for
obtaining funds from private
investors.

 Faster processing and

 Less costly.
Sources of Capital
Bootstrap Financing
Sources of Capital
Bootstrap Financing
Bootstrap Effects
Sources of Capital
Bootstrap Financing
Bootstrap financing involves using any possible
method for conserving cash such as:

 Use of discounts for volume.


 Frequent customer discounts.
 Promotional discounts.
 Savings through bulk packaging.
 Consignment financing.

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