Small Business Management – Financing an Enterprise : Challenges & Strategies

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EDI
International Training Programme on Women Empowerment through
Entrepreneurship Development
Small Business Management – Financing
an Enterprise : Challenges & Strategies
ByBy
PADMIN BUCHPADMIN BUCH
March 03, 2015March 03, 2015
For academic discussions only
Data / information are on indicative basis

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For academic discussions only
Data / information are on
indicative basis

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Entrepreneurship
 Backbone of economy world
over
 More so to our economy
 Provides great employment
opportunities
 Challenges of resource
mobilization, market and
technology

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Resource Mobilisation :
Industry in general &
Small Business in particular . . .

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Resources
Finance
Technology
Manpower
Infrastructure

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Small Business ManagementSmall Business Management
AdvantagesAdvantages
 Flexibility as well as low start-up and
operating costs have enabled SMEs to
spring up,
to reposition and
adjust themselves quickly in response to
market and economic changes.
 Moreover, they easily expand or contract in a
short time.
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Small Business Management :Small Business Management :
ProblemsProblems
 The most common problems for
SMEs are
the lack of access to market
information and technology,
 the low quality of human
resources and
Dealing with Global Trade Finance
the lack of access to capital
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Small Business Management
Challenge of
dealing in Global
Trade Finance
For academic discussions only
Data / information are on indicative basis

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Global Trade FinanceGlobal Trade Finance
Difference between domestic
and international finance
Key components
Foreign Exchange Transactions
Guiding & Regulatory Framework
Institutions
Significance

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Global Finance : CurrenciesGlobal Finance : Currencies
 Currencies are country
specific
 Currencies are neither
equivalent in value nor
stable
 Managing Currencies :
key Component of Global
Trade
 Rate of Currency
exchange : Exchange Rate

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Foreign Exchange TradingForeign Exchange Trading
 Sale or Purchase of one currency with another
 Transaction is always discussed from the point
of view of Banks
 FE quotation by a bank has two rates
Willing to buy
Willing to sell
 Principle is to buy low & sell high
 Exporter-Bank : purchase transaction for bank
 Importer-Bank : sell transaction for bank

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Types of Exchange RatesTypes of Exchange Rates
 Ready of Cash
 Tom
 Spot
 Forward

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Types of Exchange RatesTypes of Exchange Rates
 Ready for Cash : Transactions to be settled on
the same day
 Tom : Delivery of Foreign currency is to be done
on the next working day of transaction
 Spot : Delivery of Foreign currency is to be done
on the second working day of transaction
 Forward : Delivery of Foreign currency is to take
place on the date later than the spot date

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Types of Exchange RateTypes of Exchange Rate
 Cover Rate : The rate at which the
banks can cover the merchant
transactions in the inter-bank market
without any profit or loss
 Fixed & Floating Exchange rate
 Merchant Rates : Time of receiving FE
 TT Buying & Selling rate : Immediate
Transaction
 Bills buying rate & selling rate :
documents

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Global Trade Finance :Global Trade Finance :
Some relevant terms :Some relevant terms :
Correspondent BankingCorrespondent Banking
Nostro account
Vostro account
Escrow account

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Foreign currency accountsForeign currency accounts
Some relevant terms :Some relevant terms :
Correspondent BankingCorrespondent Banking
 Nostro account : “Our account with you”
A foreign currency account maintained by a
bank in own country with a bank abroad
 Vostro account : “Your account with us”
A foreign bank’s account with a bank in Home
country

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Foreign currency accountsForeign currency accounts ::
Correspondent BankingCorrespondent Banking
Escrow account :
Maintained exclusively for
business purpose
As also merchant trading
activity
By citizens outside the country
In the parent country
With permission of National
Bank

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Finance for Global Trade :Finance for Global Trade :
Letter of CreditLetter of Credit
 For short term transactions
of goods & services
 L/c is an undertaking by a
Bank / FI
 To make payment to a named
beneficiary
 Within Specified Time
 Against Submission of
documents

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Latter of CreditLatter of Credit
 L/C is opened by an importer (applicant)
 To ensure that the documentation
satisfies the conditions of the sales
contract
 For the exporter, L/C is the most secured
method of payment
 Provides security in the international
trade
 Entails cost & may be weighed.

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Letter of CreditLetter of Credit
Issuing
Bank
Advising /
Confirming Bank
Underlying
Contract
Importer
(Applicant)
Exporter
(Beneficiary)

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Letter of Credit :Letter of Credit :
Uniform Customs & Practice forUniform Customs & Practice for
Documentary CreditsDocumentary Credits (UCPDC)(UCPDC)
 Most L/c are subject to
UCP 600
 Which is the
universally recognized
set of rules governing
L/C in the international
trade
 Formulated by ICC

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Small Business Management :Small Business Management :
Funding ChallengesFunding Challenges
 Despite efforts by financial institutions and
public-sector bodies to close funding gaps,
SMEs continue to experience difficulty in
obtaining risk capital.
 These funding gaps relate to firm size, risk,
knowledge, and flexibility.
 SME borrowing requirements are small and
frequently do not appeal to financial
institutions.
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Small Business Management :Small Business Management :
Funding ChallengesFunding Challenges
 More collateral may be required than SMEs
can pledge.
 Financial institutions may lack expertise in
understanding small and medium
knowledge-based business.
 The flexibility in terms and conditions of
financing that SMEs require may not be
available.
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Project Finance. . .
 Unlike large units …
 Which can also raise
finance from Capital
market or Foreign
sources
 SMEs are dependent on
Banks / other sources

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Sources for
Finance . . .
 Conventional : Bank / State
Financial Corporation
 Non-conventional : Venture /
Angel funds
 Country specific Govt.
Schemes
 Industry / Technology specific
schemes

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Sources of Project Finance (Contd…)
Specific Sources
Venture Finance
Angel funding
Private Equity (PE)
Early Start up funding

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Venture Finance
 A type of private equity capital is provided
as seed funding to early-stage, higher risk
as also higher growth potential companies
 Stages of venture capital financing
 The seed stage
 The Start-up stage
 The Second stage
 The Third stage
 The Bridge / Pre-public stage

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Venture financeVenture finance
 In the United States, venture capital accounts for
only a small part of SME financing (under 2%)
concentrated in certain industries.
 To respond to issues raised by investors, venture
capital funds typically demand board
representation and play an active management
role, which may not be acceptable to some
(family-owned) firms
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Venture financeVenture finance
 There has been rapid growth in venture capital
and private equity in Asia since the Asian
financial crisis.
 Venture capital and private equity are
concentrated in Japan and Korea.
 Hong Kong and Singapore are also centres of the
regional venture capital activities.
 Venture capital in Chinese Taipei is concentrated
in hightech investments and started from fund
managers with experience in the U.S. venture
capital industry
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Angel funding
 An angel Investor or angel is an affluent
individual who provides capital for a
business start up
 This usually is in exchange for convertible
debt or ownership equity
 A small but increasing number of angel
investors organize themselves into angel
groups or angel networks to share research
and pool their investment capital, as well as
to provide advice to their portfolio
companies

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Angel funding
 Unlike venture capitalists and bankers, many angels are not
motivated solely by profit
 Angel investors are typically willing to accept risk and
demand little or no control in return for the chance to own a
piece of a business that may be valuable someday.
 Two kinds
 Affiliated &
 nonaffiliated.
 An affiliated angel is someone who has some sort of
contact with you or your business but is not necessarily
related to or acquainted with you.
 A nonaffiliated angel has no connection with either you or
your business

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Specific Sources of Finance
 Increasing preference for such sources
particularly by technology oriented
projects / start ups
 These essentially are equity based
funding sources
No interest burden in initial years
Such funding sources also have
insight / expertise in areas such as
finance, marketing, business modeling,
etc.

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Small Business Management : Financing an EnterpriseSmall Business Management : Financing an Enterprise
Traditional Sources of
Finance
Banks
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BanksBanks
 Traditional industries with tangible
assets and well-run businesses can
often raise funds from traditional
sources like banks
 Analysis of SME financing in the U.S.
suggests that banks and traditional
credit-granting institutions still provide
the main base
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BanksBanks
 However, for some banks financing SMEs may be
very difficult due to
lack of accurate reliable information on the
financial condition and performance;
unconvincing and weak business plans;
weakness in SMEs management,
market links,
governance and information technology.
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BanksBanks
 There can be a lack of training for banks’
staff, who might not be sufficiently informed
about lending to growing, high-risk
companies.
 Banks’ weaknesses in identifying the
characteristics of SMEs often lead to
unsatisfactory lending arrangements.
 The banks often resist due to the higher
overhead cost resulting from a high number
of customers with smaller loan size.
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BanksBanks
 The banks must adopt appropriate
lending technologies and operation
systems to enable them to realize the
market potential and to lend profitably
to small businesses.
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:
A Case Study
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A case study
Bank Rakyat , Indonesia

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 In Indonesia, the government implemented
policy to encourage banks to have at least
20% of its portfolio in SMEs.
 The Bank Rakyat Indonesia (BRI) has
developed its own approach to the
provision of financial assistance to SMEs.
 The bank developed uniquely tailored
lending programs. Administrative
procedures and collateral systems were
simplified.
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Bank Rakyat IndonesiaBank Rakyat Indonesia
 Technical assistance was provided
through SME Centers.
 Loan guarantee were provided and micro
credit insurance.
 BRI established SME Centres to provide
growing businesses access to information
technology with which to access a global
market information system.
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Bank Rakyat Indonesia :Bank Rakyat Indonesia :
a case studya case study
 BRI concluded that the
development of SMEs is not only a
bank responsibility but requires
commitment from
 financial institutions,
 large-scale companies,
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Bank Rakyat Indonesia :Bank Rakyat Indonesia :
a case studya case study
 central and regional governments
and
 other such as the Chambers of
Commerce, and NGOs.
 The government needs to develop an
integrated and comprehensive policy
in order to achieve this goal

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Policy RecommendationsPolicy Recommendations
 Promote a flexible environment for the
venture capital specific to SMEs to flourish;
 Tailor credit in banks and other similar
institutions to the need of small firms;
 Give a greater emphasis on training
programs to help banks’ staff understand
the unique requirements of SMEs better
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RecommendationsRecommendations
 Harmonization of the financial policy
framework across economies will
promote cross-border strategic
alliances including SMEs and
facilitate transfer of experiences
between the regional economies
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Sources of Finance :
International

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Project Finance :
International
 International Finance Corporation
(World Bank Group)
 Asian Development Bank (ADB)
 International Venture Funds
 Private Sector Banks / Financial
Institutions
 Schemes by Government of
respective Countries
 International Project Finance
Association ( IPFA), UK

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Finance for Small Business Units
 Entrepreneurs should
have credible business
plan
 Also convincing
approach during
discussions with such
sources of funding

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Finance for Small Business Units
Identification & Selection
of Project
Feasibility Report
Project Appraisal
Project
Finance
Tie up

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Phases of Project Business CyclePhases of Project Business Cycle
Pre-investmentPre-investment InvestmentInvestment Operating PhaseOperating Phase
IdentificationIdentification Negotiation/Negotiation/ CommissioningCommissioning
(Opportunity Study)(Opportunity Study) ConstraintConstraint Start-upStart-up
Pre-selectionPre-selection Engg. DesignEngg. Design ReplacementReplacement
(Pre-feasibility Study)(Pre-feasibility Study) RehabilitationsRehabilitations
Feasibility ReportFeasibility Report ConstructionConstruction
innovationinnovation
Pre-prodn.Pre-prodn.
marketingmarketing
AppraisalAppraisal
(Appraisal Report)(Appraisal Report)
Project Finance

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The pre-investment phase is the
most important because the
success or failure of a project
depends on its findings and
interpretation

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Feasibility Assessment
I. Introduction
II. Promoters Background & Past
Performance
III. Market Assessment
IV. Technical Feasibility Analysis
V. Cost of Project & Means of Finance
VI. Financial Viability Analysis
VII. Key Elements & Concluding Observations

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Market Feasibility
For academic discussions only
Data / information are on indicative basis

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Market Feasibility
FOCUS
 Focuses on market demand
 Highlights gap : between demand and
supply
 Gap could be positive or negative
 Collection & Analysis of information / data

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Information Gathering Methods
 Secondary Source
Research
 Primary Data Collection
 Test Marketing

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Market Survey :
Questionnaire
 Open Ended questions
 Close Ended questions
 Multiple choice questions
 Ranking questions

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Questionnaire Design :
Some Tips
 Keep it brief
 Proper Sequence
 Do not leave things to investigators
discretion (e.g. Units)
 Avoid Country specific Sensitive
questions
 Language- more than one if so
required
 Open Ended Questions at the end

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Market research :
Uncertainties…
 Information/Data are subjective
 Authenticity of sources of
information
 Un-realistic assumptions
 Lack of appreciation of macro-
economic & international factors

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Technical Feasibility

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TECHNICAL FEASIBILITY
 Is it feasible to
Manufacture/ Execute
 The Product(s)
 The Service

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Technical Analysis
 Machineries / Equipments
 Raw Materials
 Technology options
 Infrastructure and Utilities
 Manpower
 Compliance to Statutory &
Industry Specific Norms

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Technology
 Appropriate
 Proven
 Updated
 Cost-
effective

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Financial Viability
 Cost of Project
 Means of Finance
 Financial Returns
For academic discussions only
Data / information are on indicative basis

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Cost of Project :
Main components
i. Land & its development
ii. Building
iii. Plant and Machineries
iv. Technology
v. Other Assets
vi. P&P Expenses
vii. Contingencies
viii.Working Capital Margin
Capital
Investment

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Preliminary &
Pre-operative Expenses
 Legal, Financial & other
Consultancy Fees
 Traveling & Conveyance
 Salary drawn during
construction period
 Interest on Term Loan during
construction period
 Other Miscellaneous Expenses

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Cost of Project
Working Capital Margin
 Working Capital includes :
 Raw material stock, Work in
Process, Finished Goods Storage,
Receivables, Some Admn.
Expenses..
 Bank Loan may be to the extent
of 70%
 The balance is to be brought by
promoters
 This is WC Margin

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Sources of Finance
Debt
Equity

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Modes of
Finance
Term Loan
Own Funds / Promoter's
Contribution
Incentive / Subsidy
IPO
Public Private Partnership
(PPP)

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Project Finance
 Term Loan available on Fixed Assets
 Quantum of Term Loan vary
 Term loan on P& P as well as
Contingency also may be available
 Term loan on Miscellaneous Fixed
Assets not sure
 Ratio of Term Loan & Own Funds
important

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Finance for Small Business Units

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Financial Returns Analysis
 Projected profitability statement
 Cash-cum-Fund Flow statement
 Projected Balance sheet
 Break-even point
 Ratios
 Sensitivity Analysis
 Relating to the kind of
industry/project

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Finance for Small
Business Units
In a market driven economy
authentic and properly
documented data . . .
. . . facilitates the decision
making by the lenders

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THANK YOU
Padmin Buch . . .
For academic discussions only
Data / information are on indicative basis