EDP Module 7

Module-7:’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
NagendraPrasadMBA CMR-CBS 1
 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
company
 Residual 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 don’t have any right on company assets
 3.Right to control:-
 They have legal power to choosing/appointing the board of directors
 They have power to replace the board of director
 4.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 holders
2. 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 shares which reduces EPS value
4. Product ownership dilution:-Purchasing the new shares

from new share holders 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 company’s 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
CONS OF DEBT FINANCING OPTION
 Repayment (sometimes it’s 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 inventories
○ Managing 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 customer’s 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
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 profits or 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
Advantages of retained earnings:-
Advantages of retained earnings:-

 Readily availability
 Cheaper than external equity
 No 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, they are as follows:-
 Equity shares
 Preference shares
 Debentures
 Loans
 Options
 Bonds
Funding from Banks and financial institutions:-
Bank: - Bank is financial institution that

accepts deposits and channels the money
into lending activities
Functions:-
 Generates loans
 Accepts deposits
 Accepts overdrafts
 Issues loan with high safe guard and high
security
Financial institutions
 Finance is a blood for any business

 It generates every activity inherited in
the business
 Finance is mandatory for any type of
business like it may be small, medium,
and large
 Every entrepreneur needs money to
start business
 It is very important to run an enterprise
Some financial institutions
 SIDBI (Small industries development

bank of India )
 Commercial banks
 Regional rural banks
 Co-operative banks
 NABARD (national bank for agriculture
and rural development)
Schemes and types of loans for ENTREPRENEURS
 Traders easy loan scheme

 SSI loans
 Business current accounts
 Open term loan
 Retail trade
 Doctor plus
 SME credit plus
 Small business credit card
 Auto clean
 Charter for SSI
 Artisan credit card
 School plus
 Flexi loan
Entrepreneur schemes:- (by SBI Bank)
 Term loans
 Working capital
 Equity fund finance
 Stree Shakti package (For Women Entrepreneurs-50% of
applied)
Banks offered loans for entrepreneurs:-
 SBI
 HSBC
 ICICI
 Bank of Baroda
 Oriental Bank of Commerce
 And some of the 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
IPO’s
 Generally their loans are as follows:-
 High expensive in interest
 Limited time period
 Lack of disclosures
 More terms and conditions
Types 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 no or minimum outside
capital.
 Boot strap finance is generated from

friends, relatives, and private funds
Boot strap - Advantages:-
 In-expensive
 High returns
 No interest
 High worth

Boot strap -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
 Trade credit (30, 60, 90days from

lenders)
 Factoring (selling accounts receivables
to buyer)
 Real estate (leasing of any asset)
 Equipment suppliers (equipment loan

from manufactures)
Venture Capital
Definition:-venture capital is thought of as, “The

early stage financing of new and young
enterprises seeking to grow rapidly”
(OR)
Venture capital is also described as un-secured
risk financing.
 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
 Early Stage- Venture Financing
 Seed capital stage

 Start up stage
 First round finance
 Second round finance
Later Stage -venture Financing
 Expansion finance
 Replacement finance
 Turn around
 Bridge finance
 Buy outs
 Buy in
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
Sources of venture capital
 EXIM Bank
 IDBI Venture Fund
 ICICI Venture Funds Management Company
Limited
 IFCI Venture Capital Funds Limited
 GVFL (Gujarat Venture Finance Limited)
 SIDBI Venture Fund
 UTI Venture Funds Management Company
 Canara Bank Venture Capital Fund
 PIVF (Punjab InfoTech Venture Fund)
Forein Direct Investment (FDI)
Definition: - FDI is investment of foreign assets into domestic structures,
equipment, and organizations
 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
 BPO’s


EDP Module 7

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Module-7:’FINANCING THE NEW VENTURE’

 Equity share represents the ownership

 No compulsion to pay dividend for

1. Cost: - company has to pay high dividend to share holders

2. Risk: - From Investors Company get problem for not paid

3. Earnings dilution: - Dilutes the existing share holders after

4. Product ownership dilution:-Purchasing the new shares

 Autonomy: - every company has Personal

 Repayment (sometimes it’s difficult to

 Interest rates (some times high

 Collaterals and guarantees (submission

Working capital loan:-

Advantages of retained earnings:-

 The Funds which are generated by the

Bank: - Bank is financial institution that

 Finance is a blood for any business

 SIDBI (Small industries development

 Traders easy loan scheme

 Some of the private agencies they are willing to give loans

 Equity share holders

 Preference share holders

 This is offering from private companies

 Boot strap financing is defined as

 Boot strap finance is generated from

Boot strap -Dis-Advantages:-

 Trade credit (30, 60, 90days from

 Equipment suppliers (equipment loan

Definition:-venture capital is thought of as, “The

 Invested in high technology or innovative

 Early Stage- Venture Financing

 Seed capital stage

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

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

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