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RESOURCES NEEDED FOR Entrepreneurship

The document discusses various financial resources needed for entrepreneurship including debt financing, equity financing, and institutional investors. Debt financing involves borrowing money through loans, overdrafts, or mortgages. Equity financing raises capital through selling shares. Institutional investors provide large investments. Understanding different options is crucial for entrepreneurs to make informed financial decisions.

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28 views8 pages

RESOURCES NEEDED FOR Entrepreneurship

The document discusses various financial resources needed for entrepreneurship including debt financing, equity financing, and institutional investors. Debt financing involves borrowing money through loans, overdrafts, or mortgages. Equity financing raises capital through selling shares. Institutional investors provide large investments. Understanding different options is crucial for entrepreneurs to make informed financial decisions.

Uploaded by

hassiimughal102
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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NAME M.

HASSAN
SUBMITTED TO MAM SABA
DEPARTMENT LAW
SECTION A
ROLL NO FA23-LLB-047
RESOURCES NEEDS FOR ENTREPRENEURSHIP
Financial Resources Needed for Entrepreneurship
Introduction
Entrepreneurship requires substantial financial resources to initiate,
sustain, and grow a business. These resources can come from various
sources, each with unique advantages and disadvantages.
Understanding these sources and their implications is crucial for
entrepreneurs to make informed financial decisions. This document
explores debt financing, equity financing, internal and external financing,
and institutional investors, supplemented with relevant examples.

Debt Financing
Debt financing involves borrowing money that must be repaid with
interest. It is a common way for businesses to obtain necessary funds
without giving up ownership.

Types of Debt Financing


 Loans and Debentures
Loans are borrowed sums from financial institutions that need to be
repaid over a set period with interest. Debentures are unsecured loans
issued by a company, backed only by the issuer's creditworthiness and
reputation.
Example:
A startup tech company takes out a bank loan to purchase new
computers and office equipment.

 Bank Overdraft
A bank overdraft allows a business to withdraw more money than it has
in its account, up to an agreed limit. It is a flexible short-term financing
option that helps manage cash flow and cover unexpected expenses.
Example
A small retail store uses a bank overdraft to cover seasonal inventory
purchases.
 Trade Creditors
Trade creditors provide goods or services to a business on credit,
expecting payment at a later date. This allows the business to use the
goods or services immediately and pay for them once revenue is
generated.
Example:
A restaurant receives a bulk supply of ingredients from a vendor and
pays for them after 30 days.

 Borrowing Against Bills of Exchange


This involves using bills of exchange, which are written orders by a
creditor for the debtor to pay a specified amount within a set period.
Businesses can borrow against these bills as a form of short-term
financing.
Example
A manufacturing company uses bills of exchange to secure funds for
raw materials.

 Lease Finance
Lease finance is a contractual agreement where the lessee (user) pays
the lessor (owner) for the use of an asset over a period. It is a cost-
effective way to use assets without having to purchase them outright.
Example:
A startup leases office space instead of buying it to save on upfront
costs.

 Mortgage Finance
Mortgage finance involves taking out a loan secured against property.
It is commonly used for purchasing real estate, where the property
serves as collateral until the loan is repaid.
Example:
A business owner secures a mortgage to purchase a building for their
new headquarters.

 Hire Purchase Finance


In a hire purchase agreement, the buyer makes an initial down
payment and pays the remaining balance plus interest in installments.
Ownership is transferred to the buyer once all payments are made.
Example:
An auto repair shop acquires new machinery through hire purchase,
spreading the cost over several years.

Requirements for Raising Finance


To raise finance, businesses typically need a solid business plan,
financial projections, proof of creditworthiness, and collateral if required.
Understanding the terms and implications of different financing options is
also crucial.

Classifications of Debt Financing


 Short-term (1 month to 4 years):
Used for immediate operational needs and working capital.
 Mid-term (4 to 7 years):
Suitable for medium-scale investments such as equipment or
expansion.
 Long-term (above 7 years):
Ideal for significant investments in infrastructure or large-scale
expansions.
General Limitations of Debt Financing
 Implicit Costs:
Debt financing impacts cash flow due to regular interest and principal
repayments, potentially limiting financial flexibility.

 Explicit Costs:
The interest rates and fees associated with borrowing can be
substantial, affecting overall profitability.

Equity Financing
Equity financing involves raising capital through the sale of shares in the
business, offering investors ownership stakes.

Types of Equity Financing


Ordinary Share Capital
Ordinary shares represent ownership in a company, providing
shareholders with voting rights and dividends. This form of financing
does not require repayment, but it does dilute ownership and control.
Example:
A biotech startup issues shares to venture capitalists in exchange for
investment to fund their research and development.

Advantages:
o No repayment obligation.
o Access to additional skills and networks from investors.
Disadvantages:
o Dilution of ownership and control.
o Sharing of profits with shareholders.
Reverse Revenue
Reverse revenue involves reinvesting profits back into the business for
growth and expansion. It is a self-sustaining method of financing that
retains full control within the company.
Example:
An e-commerce company uses profits from sales to launch a new
product line without seeking external funding.

Advantages:
o No external liabilities or interest obligations.
o Full control over business operations.

Disadvantages:
o Limited by the amount of profit generated.
o Might slow down growth if not enough revenue is reinvested.

Capital Reserves
Capital reserves are funds set aside from profits for specific purposes
such as expansion, debt repayment, or emergencies. These reserves
provide financial stability and flexibility, enabling businesses to manage
unexpected expenses and invest in opportunities without relying on
external funding.
Example:
A tech company sets aside a portion of its profits annually to build a
reserve fund for future acquisitions or new project investments.

Institutional Investors
Institutional investors are entities that invest large sums of money on
behalf of others. Examples include commercial banks, insurance
companies, and pension funds. These investors can provide significant
capital and often bring strategic advantages, such as industry expertise
and additional resources.
Example:
A clean energy startup secures investment from a pension fund, gaining
not only funds but also industry connections and credibility.

Advantages:
o Large amounts of capital available.
o Potential for strategic partnerships and additional resources.

Disadvantages:
o High expectations and pressure from investors.
o Possible loss of some control over business decisions.

Factors Affecting the Type of Finance Sought


Explicit Costs:
Direct costs associated with raising finance such as interest rates and
fees can influence the choice of financing.
Implicit Costs:
Indirect costs, like the impact on cash flow and operational flexibility, are
crucial considerations.
Company's Gearing Level:
The ratio of debt to equity influences financial risk and borrowing
capacity, affecting financing decisions.
Size of the Company:
Larger companies have more options and better access to capital
markets, while smaller businesses may rely more on internal or short-
term financing.
Repayment Pattern:
The schedule and terms of repayment impact financial planning and
cash flow management, guiding the choice between short-term, mid-
term, and long-term financing.
Conclusion
Understanding the various financial resources available is crucial for
entrepreneurs to make informed decisions that align with their business
goals and capabilities. Whether opting for debt or equity financing,
internal or external sources, each option has unique implications.
Balancing these resources effectively can significantly impact the
success and sustainability of a business venture.

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