02 Financing Your Business Idea18.8.10.Final Ppt

7/27/2019 02 Financing Your Business Idea18.8.10.Final Ppt

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FINANCING YOUR

BUSINESS IDEADANIEL ASIEDU

MD/CEO

ZENITH BANK


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We will begin our discussion under the assumption that:

You already have an idea or hope to have one soon

The idea is well thought out, well researched and

well discussed with persons with experience in

business

You have determined your suitability and capability

for that kind of business

INTRODUCTION


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IDEA TO BUSINESS PROCESS

Generation of BusinessIdea

Determine Your

Suitability for theBusiness

Carry out a FeasibilityStudy

Seek Guidance from

Others

Maintain Proper

Records

Manage and Grow the

Business

Commence theBusiness

Seek AppropriateFinancing


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No matter how optimistic you are about your

business idea, the reality is, statistics have proven

that new businesses are probably more likely to fail

than existing businesses

Due to data unavailability in Ghana, we use a few US

statistics to explain this

FACTS ABOUT NEW BUSINESSES


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The US Bureau of Census reports that 25 percent ofbusinesses fail in the first year, 55 percent fail in the

first five years and 71 percent fail on or before the

tenth year

Furthermore, of those that survive, The US National

Federation of Independent Business (NFIB) Education

estimates show that over their lifetime only 39

percent are profitable

Hence, over their lifetime, only 11 percent of new

businesses are profitable

FACTS ABOUT NEW BUSINESS (Cont)


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From the financiers perspective, the highfailure rate of new businesses suggests

that very few ideas result in successfulbusiness ventures

This implies that a thorough evaluation ofthe potential of the idea is needed before itcan be financed

FINANCIERS PERSPECTIVE


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The more convincing the feasibility study is, themore likely it is for the business to succeed, andthe more likely a financier will take a serious lookat it

Broadly, the feasibility study should address thefollowing viability indicators:

o

Market Viabilityo Technical Viabilityo Business Viabilityo Management

o Economic and Financial Viability

FINANCIERS PERSPECTIVE (Cont)


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A financier will take a serious look only afteryou have ascertained that the idea passes allthe above

It is at this stage that appropriate fundingcan be sought. Financiers will view all

proposals purely from the businessperspective

We now discuss alternative forms of finance

FINANCIERS PERSPECTIVE (Cont)


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There are broadly two forms of finance i.e. Equitycapital and Debt capital

Equity is capital that is not ordinarily repaid toinvestors in the normal course of the business. Itrepresents risk capital and is typically raised frompromoters of the business

Debt capital, on the other hand, is capital that abusiness acquires by taking out a loan or some otherform of financing which must be repaid at some

specific future date

FORMS AND SOURCES OF FINANCE


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Venture Capital Companies: Investment companies who

provide capital for businesses with profit potential and exitafter a period

They typically finance viable young companies/ideas,

require less leverage and invest the equity funding intoworking capital to grow the business. Examples are ActivityVCF, Bedrock VCF, Fidelity Fund II, Gold VCF and Ebankese

VCF

Private Equity (PE): funds which invest in relatively matureand viable businesses. They typically buy shares fromcurrent owners with the equity funding and require moreleverage to grow the business. Examples include ICS PE Fundand Oreos

EQUITY (Contd)


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Government-Backed Grants: These are facilities granted bygovernment for business start-ups and expansions.Investments are usually targeted at strategic industries

Donor Agencies: Strategic funds for investing in certainselected industries. Each fund has its peculiar requirements.Examples include IFC and AFD

Stock Exchange: Financial market for shares and bonds usuallyused by expanding, growing and matured businesses

EQUITY (Contd)


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DEBT

The forms of debt include:

Loans from Family, Friends, Partners etc Government Backed Grants

Term Loans and Overdrafts Project Financing Trade Financing Asset Financing i.e. Leasing, Hire Purchase Guarantees Factoring Invoice Discounting Buyers Credit Suppliers Credit


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Loans from Family, Friends, Partners etc: Debtprovided to the owner usually to support start up,operational and expansion costs

Government-Backed Grants: These are facilitiesgranted by government for business start-ups andexpansions. Investments are usually targeted at

strategic industries. An example is the JapaneseGrant with the Ministry of Finance

DEBT (Contd)


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Term Loans and Overdrafts: Facilities granted byfinancial institutions to businesses as working andinvestment capital

Project Financing: involves non-recourse financingof a development and construction of a particularproject. Normally used in financing huge projects

DEBT (Contd)


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Trade Financing: Includes Letters ofCredit, Bills for Collection, Bankers

Acceptance, Export Financing, etc used tofinance trade transactions

Asset Financing i.e. Leasing, HirePurchase: a form of lending used tofinance the acquisition of fixed assets

DEBT (Contd)


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Guarantees: A mix of Performance Guarantees,Advance Payment Guarantees, RetentionGuarantees, etc provided by banks to facilitatecontractual and financial arrangements

Factoring: a non-recourse form of debt employedin financing receivables so as to release workingcapital for the business

Invoice Discounting: debt employed in financingreceivables to be repaid on collection fromcustomers.

DEBT (Contd)


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Buyers Credit: A financial arrangement in which afinancial institution in the exporting country extends aloan directly or indirectly to a foreign buyer to financethe purchase of goods and services from the exportingcountry

Suppliers Credit: A financing arrangement under

which an exporter extends credit to the buyer in theimporting country to finance the buyers purchases.

DEBT (Contd)


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The best practice in finance is that the form of capitalwhich is invested in a business depends critically onthe firms peculiar features. Mainly, its stage in thebusiness life cycle. In general,

Start-ups are best financed with equity (either

owners equity, private equity or venture capital)

STAGE USAGE OF FINANCE


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Expanding/Growing companies are financed byPrivate Equity and/or Venture Capital, in addition to

owners equity and debt

Mature companies are likely to make use of

internal financing, as well as several forms of debtand equity

STAGE USAGE OF FINANCE


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DIFFICULTY IN ACCESSING FINANCE

START-UP

BUSINESS

EXPANDING/GROWING

BUSINESS

MATURE

BUSINESS

Less Difficult

Extremely Difficult

Not Difficult


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TIPS

Not every business idea will require external funding

It is always more difficult to receive external fundingfor start-ups

The level of a financiers interest is positivelycorrelated with the level of the promoters financial

commitment

Financiers prefer projects with shorter repayment

periods


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TIPS (Cont)

You are more likely to receive external funding forprojects with smaller start-up costs

Where possible, the project/idea should be phasedif the total funding requirement is huge

Financiers will view every business idea from apurely business perspective


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THANK YOU

www.zenithbank.com.ghin your best interest

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02 Financing Your Business Idea18.8.10.Final Ppt