Sources of entrepreneurial finance

Lecture 16

Code 0454- Enterprise

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Why entrepreneurs need money

Entrepreneurs need money at times because:

They are just starting and need to buy premises and equipment. They have an opportunity to introduce a new product or service. A major item of equipment or building needs to be brought up to date.

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The sources of funds

Owners funds savings of the owner or an additional mortgage taken out on their house. Profits profits which have been retained and not paid out as dividends. Loans from a bank or other financial institution. Government grants available for specific reasons, eg expanding in a deprived/remote area.
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The sources of funds

Hiring and leasing this saves having to buy expensive items outright as payments are made in regular instalments. Issuing shares only applies to public limited companies whose shares are bought and sold on the Stock Exchange. Selling assets such as unwanted buildings or spare land. Venture capital/Business Angels finance from a investors which specialises in lending to successful entrepreneurs often in exchange for shares/profits 4

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Factors affecting the choice of funding

Advice available The amount required The cost of the money

Choosing a funding method Loss of control The length of time for which the money is needed
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The risk involved

Making the choice internal sources

Source Advantages Disadvantages Owners Owner keeps Could lose funds control everything if business fails Retaine Owner(s) d profit make decision
Reduces reserves and possibly future dividend payments. May be insufficient for needs.
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Making the choice bank options

Source
Bank loan

Advantages
Advice available. Repaid over an agreed period

Disadvantages
Bank may refuse. Repayments may rise if interest rates increase.

Overdraft Cheaper than loan Bank may refuse. for short-term Only very shortfinance term.
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Making the choice other external sources

Source Advantage Government May not need to grant be repaid though spending closely checked Hiring and Saves paying upfront for an leasing Disadvantage Complicated and restricted to certain areas/reasons
Only useful for obtaining assets. Costs more than outright purchase.
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asset. Asset may belong to business eventually.

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Making the choice other external sources

Source Issuing shares Disadvantage Only for Big Cos Shareholders paid dividends Selling Converts unused Only appropriate assets items into capital if have unused assets! Venture Large amount may Owner may lose capital be available + some control over advice business
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Advantage Large amounts available, never repaid

Evaluating various types of credit available to the entrepreneurs.

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Who uses Credit?

Consumer Credit Credit used by people for personal reasons. Commercial Credit Credit used by entrepreneurs.

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Types of Credit
Charge Accounts most common type of shortterm or medium-term credit.
Regular Charge Accounts Require that you pay for purchases in full within a certain period of time. Revolving Charge Accounts Allows you to borrow or charge up to a certain amount of money (credit limit) and pay back a part or the entire balance each month. Budget Charge Accounts Allows you to pay for costly items in equal payments spread out over a period of time.
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Single-Purpose

Credit Cards

Can only be used to buy goods or services at the business that issued the card. Examples: JC Penney, Sears

Multipurpose
Similar to a revolving charge account. May be used at several locations. Examples: Visa and Master Card

Travel and Entertainment

Similar to regular charge accounts. Must be paid in full each month. Example: American Express
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Banks and Other Financial Institutions

Single Payment Loan
Debtor pays off loan in one payment. Promissory Note
Written promise to repay with interest.

Installment Loan
Repaid in regular payments.

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Types:

Instalment Loans

Student, mortgage, automobile, etc.

Secured vs. Unsecured

Secured loans are backed by collateral (help guarantee the repayment of a loan).

Closed vs. Open Ended

Closed-end credit is used for a specific purpose and involves a definite amount of money. Open-end credit gives you a certain limit on the amount of money you can borrow.

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Seller-Provided Credit
Many stores/debtors provide credit to entrepreneurs. Offer purchasers a 30, 60 or 90 day payment

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Consumer Finance Companies

Specialize in loans to people with poor credit ratings. The cost of credit is higher than other institutions.

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Other Sources of Credit for Businesses

Small Business Administration
Offers a number of financial, technical, and management programs to help businesses.

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Determining the advantages and disadvantages of using credit.

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Immediate Possession Convenience

Buy now and pay later.

Advantages

Emergencies Saving Money

Buy an item while it is on sale.

Credit Rating
Establish a favorable credit rating.

Growth of the Economy

Buying goods will help the economy expand.
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 Overbuying

Disadvantages

Most common hazard.

Careless Buying
Comparison shopping may not be a priority Encourages impulse buying

Higher Prices
Some stores offer discounts for cash 21 sales.

Disadvantages continued
Overuse of Credit
Too much is owed unable to pay back.

Credit Fees
Interest paid on balance

Habit Forming

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Results of Overuse
Garnishment of Profits
Money deducted from profits for money owed.

Repossession
Loss of property because of failure to repay loan.

Bankruptcy
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