CIE Lecture 16 Sources of Entrepreneurial Finance

7/31/2019 CIE Lecture 16 Sources of Entrepreneurial Finance

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Sources of entrepreneurialfinance

Sources of entrepreneurialSources of entrepreneurialfinancefinance

Code 0454- Enterprise

Lecture 16

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Why entrepreneurs needmoney

They are just starting and need to buypremises and equipment.

They have an opportunity to introduce anew product or service.

A major item of equipment or buildingneeds to be brought up to date.

Entrepreneurs need money at times because:


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The sources of funds

Owners funds savings of the owner or anadditional mortgage taken out on their house.

Profits profits which have been retainedand not paid out as dividends.

Loans from a bank or other financialinstitution.

Government grants available for specific

reasons, eg expanding in a deprived/remotearea.

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The sources of funds Hiring and leasing this saves having to

buy expensive items outright as paymentsare made in regular instalments.

Issuing shares only applies to publiclimited companies whose shares are boughtand sold on the Stock Exchange.

Selling assets such as unwanted buildings

or spare land. Venture capital/Business Angels finance

from a investors which specialises inlending to successful entrepreneurs oftenin exchange for shares/profits


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The amount

required

Factors affecting the

choice of funding

The length of timefor which the money

is needed

The risk

involved

The cost of

the money

Loss of

control

Advice

available

Choosing a

funding method

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Making the choice internal sources

Owner(s)makedecision

Reduces reservesand possibly future

dividend payments.May be insufficientfor needs.

Retained profit

Could loseeverything ifbusiness fails

Owner keepscontrol

Ownersfunds

DisadvantagesAdvantagesSource


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Making the choice

other external sources

Owner may lose

some control overbusiness

Large amount may

be available +advice

Venture

capital

Only appropriateif have unusedassets!

Converts unuseditems into capital

Sellingassets

Only for Big Cos

Shareholders paiddividends

Large amountsavailable, neverrepaid

Issuingshares

DisadvantageAdvantageSource

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Evaluating various types of creditEvaluating various types of creditavailable to the entrepreneurs.available to the entrepreneurs.


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Who uses Credit? Consumer Credit

Credit used by people forpersonal reasons.

Commercial Credit

Credit used by entrepreneurs.

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Types of CreditCharge Accounts most common type of short-term or medium-term credit. Regular Charge Accounts

Require that you pay for purchases in full withina 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 apart 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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Credit CardsSingle-Purpose 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 OtherFinancial 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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Instalment LoansTypes: Student, mortgage, automobile, etc. Secured vs. Unsecured

Secured loans are backed by collateral (helpguarantee 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 FinanceCompanies

Specialize in loans to people with poorcredit ratings.

The cost of credit is higher thanother institutions.

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Other Sources of Creditfor Businesses

Small Business Administration Offers a number of financial, technical,

and management programs to helpbusinesses.


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Determining the advantages andDetermining the advantages anddisadvantages of using credit.disadvantages of using credit.

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Advantages Immediate Possession Convenience

Buy now and pay later.

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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Disadvantages Overbuying

Most common hazard.

Careless Buying Comparison shopping may not be a

priority

Encourages impulse buying

Higher Prices Some stores offer discounts for cash

sales.

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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 moneyowed.

Repossession Loss of property because of failure to

repay loan.

Bankruptcy

Documents

CIE Lecture 16 Sources of Entrepreneurial Finance