PowerPoint Presentation

WK10 - Sources of Funding

Workshop 3Wednesday 4th March 2015Dr. Jack LovellMKTM033 The Entrepreneurship ReportYou & your business ideaMarket segments & value propositionMarketing StrategyOperations planRisk & strategic optionsFinancial planResources availableResources neededSources and Uses of FinanceEquityPersonal, family and friends investmentAngel financeVenture financeLong and medium term loansPersonal, family and friendsBankLease and hire purchaseCrowdfunding (equity or loan)Seasonal fluctuations in working capitalStockDebtors (net creditors)Bank overdraftShort term loansPersonal, family and friendsBankFixed assetsLand and buildings Plant, machinery and equipment VehiclesComputers and furniturePermanent working capitalStockDebtors (net creditors)Source of financeUse of financeShort termLong and medium termTerm Loans:Personal, Family and FriendsAdvantagesInterest payments may be requiredCan strain relationships if repayments not made as expectedIf business fails, family and friends may sufferFamily and friends may interfere in the businessDisadvantagesSecurity unlikely to be requiredLoans may be informal capital repaid as and when cash flow improvesInterest payments may not be required or may be deferredBank OverdraftAdvantagesRepayable on demandInterest rate is variableCan be expensive if in permanent overdraft as interest rate is usually higher than on term loans Usually secured against business assets and can be refused because of lack of securityPersonal guarantee may then be requiredDisadvantagesFlexible once agreed, available on demandCan be cheap if you dip into and out of it you only pay interest when you use itGood solution to short-term financing needsTerm Loans:Banks and CrowdfundingAdvantagesUsually secured against business or personal assetsCan be refused because of lack of securityRequires good cash flow to pay interest and repay capitalCrowdfunding website charge fee based on funds raisedDisadvantagesTerm of loan is fixed usually not repayable on bank demandCapital repayments fixed and known in advanceInterest rate can vary or be fixed and is usually lower than an overdraft

Asset Security ValuesFreehold land and buildingsLong leaseholdSpecialist plant and machineryNon-specialist plant & machineryDebtorsStock70%

60%510% 100% through leasing

30% 100% through leasing

3050% Depends on age and quality25% Depends on age and quality% value that can be borrowedAssetLoan Purpose, amount and repayment termsFinancial Cash flow, breakeven and gearingPersonal Character and abilityBanks Considerations

Frequent excessesDevelopment of hard-core borrowingLack of financial informationYour availabilityInability to meet forecastsContinuing losses, declining margins and rapidly decreasing/increasing salesWhat Worries BanksLease FinanceAdvantagesExpensive compared to rates of interest charged on loansRequires adequate cash flow to meet regular paymentsDisadvantagesGuarantees not required security is on assets purchasedEquity Finance:Personal, Family and FriendsAdvantagesDividends may be expectedSelling shares to outsiders dilutes stake in the business and may lead to loss of controlOutsiders providing equity may want to interfereDisadvantagesGood, secure long term financeNo interest or capital repaymentCan be used to lever further loan finance

Risk and return Typically 30% to 60% p.a. return (equivalent to multiplying their investment by 4 to 6 times in 5 years)Exit route (liquidity event) Typically liquidation of investment within 5 to 10 yearsWhat Investors are Looking for

Buy-backTrade saleManagement buy-outManagement buy-inSecond-stage financeStock market floatationExit OpportunitiesCrowdfunding EquityAdvantagesInvestors will need to see an exit route (liquidity event)Dividends may be expectedCrowdfunding website charge fee based on funds raisedDisadvantagesGood, secure long term financeCan be used to lever further loan financeSmall amounts of equity availableBased on business plan not securityAngel FinanceAdvantagesOnly really available to growth businessesA proportion of profits and capital growth go to AngelsDividends may be expectedAngels will sell on their investment in the future Angels may be seen as interferingDisadvantagesGood, secure long term financeCan be used to lever further loan financeSmall amounts of equity availableBased on business plan not securityInvestment usually for 5 to 10 yearsHands-on expertiseVenture FinanceAdvantagesOnly for businesses with very significant growth prospects nA proportion of profits and capital growth go to investorDividends expectedInvestors will want to sell-on in the future usually through a stock market floatationRequires very detailed information disclosureTakes timeDisadvantagesGood, secure long term financeLarger amounts often used as second stage Based on business plan not securityUsually for 5 to 10 yearsCan offer longer-term strategic advice but no day-to-day involvementAid with additional loansNo interest or capital repayments