Financing new Projects

Important aspects:
• Understand the different funding sources available to businesses
and the circumstances under which these should be approached
• Evaluate the extent to which market imperfections, including the
finance gap and equity gap acts as a barrier to growth of
businesses
• Recognize the financial problems that new and young businesses
are likely to encounter, through reporting of profit and loss, cash
flow and balance sheet
• Identify key financial issues facing the entrepreneural businesses
 Financial needs – The uses of funds
Particularly small businesses need money to finance a host of different
requirements. There are 3 core factors which affect the potential source of
funding and the level of funding required by a small business:
1. The type of finance is contigent on the particular trading form of the
business concerned.
a. A limited liability company has limited liabilities based on assets of the
company and not necessarily the property of the managers, but personal
guarantees and directors obligations can reduce limitations. Here there is a
wide choice in raising money, including further equity investments. Selling up
can be flexible as can part or all of shares
b. Sole trader: all assets liable including those not involved in the business.
In raising money options are limited to overdraft or loan. They cannot access
external equity, since without a separately existing company there is no means
of owning shares in the enterprise.
Financial needs – The uses of funds
c. Partnership: Liability extends to business
debts of other partners. Raising money is with
the options of overdraft, loans or new partners
with money. In the event of selling up, only the
assets can be sold, difficult if selling part of the
business.
Financial needs – The uses of funds
2. The second factor is the venture’s stage of
development.
Money required to fund new business ideas,
which may or may not be proven(so-called seed-
corn funding) will be offered under different
terms from, for e.g. venture capital required to
fund some aspects of early business growth.
The key determining factor in this respect is the
relation between risk and reward.
Financial needs – The uses of funds
3. The potential source of funding and the level
required will depend upon the nature of
assets for which finance is required.
If internal funds are not adequate, then external
finance becomes necessary.
The small business will prefer debt to equity in
the first instance, since the former is
informationally less sensitive than the latter.
 The uses and sources of funds for a small
business

1. A small firm needs permanent capital for in instances of :

• Start- up
• expansionand development
• Innovation
• Refinancing
So it requires equity capital, for which the main sources are:
• Personal investment
• Venture capital institutions
• Public sector sources
• Public equity
 The uses and sources of funds for a small
business
2. A small firm needs working capital for the following purposes:
• Debtor / creditor gap
• Seasonal fluctuations
• Bridging finance
• Short-lived assets
The main sources of working capital ( short finance up to three
years) are:
• Clearing banks
• Finance houses
• Leasing companies
• Public sector sources
 The uses and sources of funds for a small
business
3. A small business needs asset finance for the following purposes:
• Plant and machinery
• Equipment and furniture
• Buildings
• Vehicles
So it requires medium-to-long term finance for which the main sources are :
• Clearing banks
• Venture capital institutions
• Pension funds
• Insurance companies
• Leasing companies
• Public sector sources