EDP Module 7

8/7/2019 EDP Module 7

1/10

BU-EDP-Module-7

1 NagendraPrasadMBA | CMR-CBS

ModuleModuleModuleModule----7:FINANCING THE NEW VENTURE7:FINANCING THE NEW VENTURE7:FINANCING THE NEW VENTURE7:FINANCING THE NEW VENTURE

Sources of capital: -

Generally raising money to launch an enterprise has been challenge and very difficult

for the entrepreneurs.Generally every entrepreneur gets money or raise money from the following ways....

Banks Financial institutions Equity share capital IPO Loans Debentures

Even though entrepreneur has number of ways for getting finance but choosing the

best is again challenge and he should approach the a financial adviser

Every entrepreneur has to identify his future commitments and then estimate the

finance

He must maintain a good network with his creditors, investors, lenders, customers

and etc

An entrepreneur should have basic knowledge on all goods, services, and all

activities

Finally every entrepreneur should follow business plan for survival of him and his

company

EQUITY FINANCING (or) EQUITY SHARE CAPITAL

Equity share represents the ownership position in a company

The holders of these shares are called equity share holders They are legal owners of the company Their capital is permanent and has no maturity date They will get dividend/return/benefit Their dividend in return is not fixed; hence it is called variable income security

Features of equity shares

1. Right to income:-Every equity share holder has Right to income

They had claim on residual income on companyResidual income refers after paying :-----

Taxes Expenses Interest charges Preference dividend

2. Claim on assets:- Every equity share holders has paid last after claim of debt holders and preference

share holders paid

They dont have any right on company assets


2/10

BU-EDP-Module-7


3. Right to control:- They have legal power to choosing/appointing the board of directors They have power to replace the board of director4. Voting rights:- Every equity share holder has right to vote for electing board of directors Every equity share holder can participate in the vital affair of election of board of

directors

5. Limited liability:- Every equity share holders has limited liability with the company because once he

paid investment back then no liability.

Advantages of equity capital(for company)

No compulsion to pay dividend for equity share holders

Permanent capital (no maturity date)

Cushion to lenders (easily borrowing capital)Tax exemption (dividends are free from tax)

Dis -Advantages of equity capital(for company)

1. Cost: - company has to pay high dividend to share holders2. Risk: - From Investors Company get problem for not paid dividend at the time

of windup of company

3. Earnings dilution: - Dilutes the existing share holders after issuing new shareswhich reduces EPS value

4. Product ownership dilution:-Purchasing the new shares from new shareholders makes that product dilutes and reduces the EPS of that product.

DEBT - FINANCING

Debt:-

Debt means borrowing money from outside source under predetermined terms and

conditions

Debt is a good option to raise money to grow your business without given up?

Every company it may be small or big or medium it requires surplus finance for

expansion of company activities

But some large scale companies prefer equities than debts

PROS OF DEBT FINANCING OPTION

Autonomy: - every company has Personal independence for raising finance with minimum

terms and conditions

Tax benefits: - interest payments on loans are deducted from the companys income before

calculation tax

Discipline: - generally investors think managers in the company is working hard for them but

actually managers are working for achieving profits


3/10

BU-EDP-Module-7


CONS OF DEBT FINANCING OPTION

Repayment (sometimes its difficult to repay at the time of bankruptcy)

Interest rates (some times high interest rates)

Collaterals and guarantees (submission of ownership documents for loan, debts)

TYPES OF DEBT FINANCING

Working capital loan:-

This is short term loan for raising finance

This is mainly raised for

Purchase of Raw materials

Payment of wages

Administrative expenses

Financing inventoriesManaging internal cash flows

Supporting supply chains

Funding production

Marketing operations

Overdraft:-

This is also one type of short term debt option

Company have a current account for this facility

Bank gives certain limit of money for overdrew

Factoring:-

The bank buys the customers account receivables The operation of trade is done at domestic and international The entire responsibility took over the bank Company will rotate the entire money

Commercial papers(CP):-

It is short term money market debt Issued by the companies Issued at a discount on face value (actual value of bond) They are purchased by banks, indusial, and mutual funds

Term loans:-

Loan particularly taken for particular period of time

They are mainly taken for buying companies assets and grow business


4/10

BU-EDP-Module-7


Syndicated loans:-

They are large loans

They are raised by big corporations

Issued by the group of banks

Their aim to acquire domestic and international companies

Project finance:-

They are raised in large

They are used for long term infrastructure projects

Requires huge amounts

Raised in the form of tenders

They are very sensitive and including of formalities

Debentures:-

They are long debt instrument

Issued by the company by acknowledgement

It will be repay in future at pre determined interest rate

Inter-corporate deposits:-

This is fund issued by one surplus corporate

And it is received by one more corporate need of funds

This type of funds are very securitized

Personal loans:-

Issued by the banks, financial institutions

Received by entrepreneurs

For the purpose of any type of business

The business may be big or small banks approves

Issued with full of security only

Internal Funds (or) External Funds:-

Any new business can be financed by internal or external funds

Internal Funds:- the funds which are generated by the all ready existing business or profitsor benefits of any company are known as internal funds and example is-----

Retained earnings:-

Generated inside the company

They generated through trading/business

They are not distributed as dividends

They are holding for future expansion

Contribution from equity share holders in some cases


5/10

BU-EDP-Module-7


Advantages of retained earnings:-

Readily availabilityCheaper than external equityNo ownership dilution (no partnership with share holders)Positive connotation (An idea that is implied or suggested)

Dis-Advantages of retained earnings:-

Limited finance

High opportunity cost (sacrifice done by share holders)

Sale of assets (for emergency)

Cash

External Funds:-

The Funds which are generated by the external sources are known as external funds, theyare as follows:-

T Equity sharesT Preference sharesT DebenturesT LoansT OptionsT Bonds

Funding from Banks and financial institutions:-

Bank: - Bank is financial institution that accepts deposits and channels the money into

lending activities

Functions:-

T Generates loansT Accepts depositsT Accepts overdraftsT Issues loan with high safe guard and high security

Financial institutions:-

D Finance is a blood for any businessD It generates every activity inherited in the businessD Finance is mandatory for any type of business like it may be small, medium, and

large

D Every entrepreneur needs money to start businessD It is very important to run an enterprise


6/10

BU-EDP-Module-7


Some financial institutions:-

v SIDBI (Small industries development bank of India )v

Commercial banksv Regional rural banksv Co-operative banksv NABARD (national bank for agriculture and rural development)

Schemes and types of loans for ENTREPRENEURS

U Traders easy loan schemeU SSI loansU Business current accountsU Open term loanU Retail tradeU Doctor plusU SME credit plusU Small business credit cardU Auto cleanU Charter for SSIU Artisan credit cardU School plusU Flexi loanEntrepreneur scheme:- (by SBI Bank)

F Term loansF Working capitalF Equity fund financeF Stree Shakti package (For Women Entrepreneurs-50% of applied)

Banks offered loans for entrepreneurs:-

V SBIV HSBCV ICICIV Bank of BarodaV Oriental Bank of Commerce& some of the other banks

Private placement:-

Some of the private agencies they are willing to give loans for entrepreneurs with

their frame rule, terms, and conditions and mutual agreements along with high

security and high interest rates.

Regulation D (Rules 505 & 506)

This memorandum describes legal registration for private placement of for selling

stocks in common manner like IPOs


7/10

BU-EDP-Module-7


Generally their loans are as follows:-

High expensive in interest Limited time period Lack of disclosures More terms and conditionsTypes of investors:-

Equity share holders

Debt holders

Preference share holders

General public

Private offerings:-

This is offering from private companies

Under the regulation D (504)

Deals with-Small Company Offering Registration (SCOR)

Also known as Uniform Limited Offering Registration

Created and framed in 1980 in US

Created for small companies for selling their stock to public

No need to submit or register or satisfying the SEBI guidelines

Boot strap Financing:-

Boot strap financing is defined as building a business out of little of nothing with noor minimum outside capital.

Boot strap finance is generated from friends, relatives, and private fundsAdvantages:-

In-expensive High returns No interest High worth

Dis-Advantages:-

This type of financing is unnecessary for entrepreneur It is not enough funds for business Risk is inherited in this type of finance with relationships

Sources of bootstrap financing:-

T Trade credit (30, 60, 90days from lenders)T Factoring (selling accounts receivables to buyer)T Real estate (leasing of any asset)T Equipment suppliers (equipment loan from manufactures)


8/10

BU-EDP-Module-7


Venture Capital:-

Definition:-venture capital is thought of as, The early stage financing of new and young

enterprises seeking to grow rapidly

(OR)

U Venture capital is also described as un-secured risk financing.U Venture capital represents financial investment in a highly risky proposition made in

the hope of earning a high rate of return.

The first stage of investment (not considering future)

Features of venture capital:-

Invested in high technology or innovative goods/services High risky investment Chances of failures Returns of venture capital are much liquidated They are long term investments Venture capital firm (VCF) encourages nature VCF helps newly upcoming entrepreneurs

Stages of venture financing:-

Seed capital stage Invested Small amount- to prove concept

Start up stage Initial product development & marketing

First round finance Ready to manufacture a product

Second round finance Working capital required for manufacturing

Expansion finance Funds required for expansion

Replacement finance Untagged high interest funds/services-replace with best

sources-positive cash flows

Turn around Breakeven point of profits and sales

Bridge finance Bridge between public and venture investors

Buy outs Take over ownership of; of corporations and companies

Buy in Stock up on to keep for future use or sale

Early Stage- Venture Financing Later Stage -venture Financing

T Seed capital stageT Start up stageT First round financeT Second round finance

T Expansion financeT Replacement financeT Turn aroundT Bridge financeT Buy outsT Buy in


9/10

BU-EDP-Module-7


Sources of venture capital:-

D EXIM BankD

IDBI Venture FundD ICICI Venture Funds Management Company LimitedD IFCI Venture Capital Funds LimitedD GVFL (Gujarat Venture Finance Limited)D SIDBI Venture FundD UTI Venture Funds Management CompanyD Canara Bank Venture Capital FundD PIVF (Punjab InfoTech Venture Fund)

Foreign Direct Investement(FDI):-

Definition: - FDI is investment of foreign assets into domestic structures, equipment, andorganizations

Features:-

Foreign country is directly investing in India Not invested in stock market It is very hot investment for India It is life blood for economic development Mainly issued for small, big manufacturing industries Increases countries trade balance Increases labour standards & skills Transportation of new technology Importing of new innovative ideas Improves infrastructure Improves general business climate

FDI Key sectors:-

Hotel & tourism

Private sector banking Insurance sector Telecommunication Trading (exports/logistics) Power Drugs & pharmaceuticals Roads, highways, ports & harbours Pollution control and Management Call centres in India BPOs


10/10

BU-EDP-Module-7


Documents

EDP Module 7