Insurers' journeys to build a mastery in the IoT usage
Small Business Financing
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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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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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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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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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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
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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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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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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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