Lim Sei Kee @ cK. Often the hardest part of starting a business is raising the money to get going. The entrepreneur might have a great idea and clear.

DIP – Sources of FinanceLim Sei Kee @ cK

Often the hardest part of starting a business is raising the money to get going.

The entrepreneur might have a great idea and clear idea of how to turn it into a successful business.

However, if sufficient finance cannot be raised, it is unlikely that the business will get off the ground.

Introduction

Set-up costs (the costs that are incurred before the business starts to trade)

Starting investment in capacity (the fixed assets that the business needs before it can begin to trade)

Working capital (the stocks needed by the business –e.g. raw materials + allowance for amounts that will be owed by customers once sales begin)

Growth and development (e.g. extra investment in capacity)

Finance needs of a start-up [$$$]

One way of categorizing the sources of finance for a start-up is to divide them into sources which are from within the business (internal) and from outside providers (external). 

Personal sourcesInternal sourcesExternal sources

Savings and other “nest-eggs”

An entrepreneur will often invest personal cash balances into a start-up.

This is a cheap form of finance and it is readily available.

Investing personal savings maximizes the control the entrepreneur keeps over the business. 

Personal sources

Re-mortgaging

The entrepreneur takes out a second or larger mortgage on a private property and then invests some or all of this money into the business.

The use of mortgaging like this provides access to relatively low-cost finance, although the risk is that, if the business fails, then the property will be lost too.

Personal sources

Borrowing from friends and family

Friends and family who are supportive of the business idea provide money either directly to the entrepreneur or into the business.

This can be quicker and cheaper to arrange and the interest and repayment terms may be more flexible than a bank loan. 

Personal sources

Credit cards

Each month, the entrepreneur pays for various business-related expenses on a credit card.

15 days later the credit card statement is sent in the post and the balance is paid by the business within the credit-free period.

The effect is that the business gets access to a free credit period of around 30-45 days!

Personal sources

Retained profits

This is the cash that is generated by the business when it trades profitably – another important source of finance for any business, large or small.

Internal sources

Share capital – invested by the founder

The founding entrepreneur may decide to invest in the share capital of a company, founded for the purpose of forming the start-up. 

Once the investment has been made, it is the company that owns the money provided.

The shareholder obtains a return on this investment through dividends (payments out of profits) and/or the value of the business when it is eventually sold.

Internal sources

Loan capital

This can take several forms, but the most common are a bank loan or bank overdraft. 

External sources

Bank loan

It provides a longer-term kind of finance for a start-up, with the bank stating the fixed period over which the loan is provided (e.g. 5 years), the rate of interest and the timing and amount of repayments. 

Bank loans are good for financing investment in fixed assets  and are generally at a lower rate of interest than a bank overdraft. 

External sources

Bank overdraft

An overdraft is really a loan facility – the bank lets the business “owe it money” when the bank balance goes below zero, in return for charging a high rate of interest.

Bank overdrafts are excellent for helping a business handle seasonal fluctuations in cash flow or when the business runs into short-term cash flow problems.

External sources

Share capital – outside investors For a start-up, the main source of outside (external) investor in the

share capital of a company is friends and family of the entrepreneur.

They may be prepared to invest substantial amounts for a longer period of time; they may not want to get too involved in the day-to-day operation of the business.

Both of these are positives for the entrepreneur. 

External sources

Business angels Business angels are professional investors who typically

invest $10k - $750k. 

Angels tend to have made their money by setting up and selling their own business – in other words they have proven entrepreneurial expertise.

In addition to their money, Angels often make their own skills, experience and contacts available to the company. 

External sources

Venture Capital

Venture capital is a specific kind of share investment that is made by funds managed by professional investors.

Venture capitalists rarely invest in genuine start-ups or small businesses (their minimum investment is usually over $1m, often much more).

A start-up is much more likely to receive investment from a business angel than a venture capitalist.

External sources

1. List down at least five reasons of why a start-up needs financing.

2. What are the sources of finance of a start-up? List at least five.

3. For ALL the sources of finance from Q2 , list down: A) three characteristics B) three advantages C) three disadvantages

EXERCISE. In a group of 3:

Do you still remember?

Individual assignment: Submit your MIND MAP anytime before the end of October 2014.

TASK 1: OneBiz

Go to JPKE Official website (www.depd.gov.bn) Look for current survey / census: Preliminary Report of The Economic Census

2011 Print the report (9 pages) [PAGE 3 – 8]

TASK 2Bring this next session:

Leasing

Hire Purchase

Debt Factoring

Government Finance

Other Sources of External Finance

Leasing is like renting a piece of equipment or machinery.

The business pays a regular amount for a period of time, but the item belongs to the leasing company.

Example: The business pays a monthly fee for the car and at the end of the period, the business return the car / swap for a newer model.

Leasing

Cheaper in the short run than buying a piece of equipment outright.

If technology is changing quickly or equipment wears out quickly it can be regularly updated or replaced.

Cash flow management easier because of regular payments.

Advantages of Leasing

More expensive in the long run, because the leasing company charges fees which make the total cost greater than the original cost.

Disadvantages of Leasing

Business hires the equipment for a period of time making fixed regular payments.

Once payments have finished it then owns the piece of equipment.

Hire purchase is different to leasing in that the business owns the equipment when it has finished making payments.

Hire Purchase

A business sells its outstanding customer accounts (those who have not paid their debts to the business) to a debt factoring company.

The factoring company pays the business - say 80-90% of face value of the debts - and then collects the full amount of the debts.

Once it has done this it will pay the remaining amount to the business less a charge.

Debt Factoring

√ It is a good way of raising cash quickly, without the hassle of chasing payments.

X It is not so good for profits since it reduces the total revenue received from those sales.

Pro and Con of Debt Factoring

The government provide help to businesses for the following reasons:

Protect jobs in failing/declining industries.

Help create jobs in areas of high unemployment.

Help start up new businesses.

Help businesses relocate to areas of high unemployment.

Government Finance

Local Enterprise Application and Products (LEAP)

Promising Local Enterprise Development Scheme (PLEDS)

Ignite Competition

BEDB - Youth Development Resources (YDR) programme

Aiti financial assistance

Brunei Government Finance:

Survey about any of the Brunei Government Finance [LEAP, PLEDS, Ignite Competition, YDR programme, Aiti financial assistance] and share it with everyone NEXT WEEK!

- What is it? - How to apply? - Who is eligible? - Returns? - How much money?

Work individually: