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ENTERPRISE CREATION &
Financing the Business 1
Mr Nicholas Tan Tian Leng
ECD Oct 14 / Lecture 5 / ttl 1
Sources of financing
Types of financing
◦ Equity financing
◦ Debt financing
How different finance options will affect
2ECD Oct 14 / Lecture 5 / ttl
• Donald F. Kuratko ENTREPRENEURSHIP –
THEORY, PROCESS AND PRACTICE, 9th
Edition, CENGAGE, Chp 7,9 & 15
• Justin G. Longenecker, Carlos W. Moore, J.
William Petty and Leslie E. Patch, SMALL
BUSINESS MANAGEMENT – AN
ENTREPRENEURIAL EMPHASIS, International
Edition, Thomson South-Western, Chp 12
3ECD Oct 14 / Lecture 5 / ttl
After deciding on how to start your business, &
which business structure to use (in the last
lecture), you need to ask:
1. Where are you getting the money for your
2. What about later?
We will go through the different Financing
options in this lecture.
4ECD Oct 14 / Lecture 5 / ttl
Sources of funding
- Level of risk
- Stage of firm’s
ECD Oct 14 / Lecture 5 / ttl
Types of financing
6ECD Oct 14 / Lecture 5 / ttl
Money invested in the venture with no
legal obligation for entrepreneurs to
repay the principal amount or pay
interest on it.
But entrepreneurs will need to share
ownership & profits with the funding
7ECD Oct 14 / Lecture 5 / ttl
Sources of equity financing
8ECD Oct 14 / Lecture 5 / ttl
b) Informal investors
ECD Oct 14 / Lecture 5 / ttl 9
c) Public offerings
Initial public offering (IPO) refers to a corporation raising
capital through the sale of securities on the public markets.
◦ Able to raise huge sums of capital in a short period.
◦ Public market provides liquidity for owners since they
can readily sell their shares.
◦ The marketplace puts a value on the company’s shares,
which in turns allows value to be placed on the
◦ The image of a publicly traded corporation is stronger in
the eyes of suppliers, financiers & customers.
10ECD Oct 14 / Lecture 5 / ttl
c) Public offerings
◦ Costs involved with a public offering are much higher. Eg
accounting fees, legal fees, prospectus printing, costs of
◦ Detailed disclosures of the company’s affairs must be
◦ Paperwork involved with government regulations etc
drains a lot of time, energy & money.
◦ Pressure from shareholders could lead to short term
views of the company.
11ECD Oct 14 / Lecture 5 / ttl
d) Private placements
Money invested by private investors.
May be possible to avoid issuing a prospectus
(rules differ from country to country).
Suitable for an injection of capital to jump to
the next level of growth.
And have a proven track record of
12ECD Oct 14 / Lecture 5 / ttl
e) Venture capitalists (VCs)
Professionals that provide a full range of financial
services for new or growing ventures, including:
Capital for start–ups and expansion
Market research and strategy
Management consulting functions
Contacts with prospective customers and
Assistance in negotiating technical agreements
Help in management and accounting controls
Help in employee recruitment
Help in risk management
Guidance with government regulation
ECD Oct 14 / Lecture 5 / ttl 13
e) Venture capitalists’ objectives
Different from other investors
VCs will carefully measure both product/service
Concerned with return on investment (ROI)
Returns are expected to be consistently high
14ECD Oct 14 / Lecture 5 / ttl
e) Evaluating the venture
Don’t hesitate to evaluate the venture
– Does the venture capitalist understand the
– Is the individual familiar with the business?
– Is this someone I can work with?
‘You can divorce your spouse,
but you can’t divorce your investor’
15ECD Oct 14 / Lecture 5 / ttl
More on Venture Capitalists
Financing, With Strings Attached (The
New York Times)
16ECD Oct 14 / Lecture 5 / ttl
f) Angel investors
An angel investor has already made their
money and now seeks out promising
Currently expecting lower valuations
and more control.
ECD Oct 14 / Lecture 5 / ttl 17
f) Angel investors
– Senior managers laid off or retired with generous payouts
– Own and operate successful businesses
– Independently wealthy from success in a business they
– Attempt to impose their management style
– Invest in companies with products/services they know
18ECD Oct 14 / Lecture 5 / ttl
• Debt involves borrowing money, with an
obligation to pay it back with interest and
usually to a deadline or timeline.
19ECD Oct 14 / Lecture 5 / ttl
20ECD Oct 14 / Lecture 5 / ttl
1) Commercial banks
A major source of small business debt financing.
Loans are secured by fixed assets, receivables,
inventories, or other assets.
Generally require collateral and systematic
Not interested in future prospects.
21ECD Oct 14 / Lecture 5 / ttl
2) Trade credit
◦ Credit given by suppliers who sell goods on
account, usually 30 – 90 days.
◦ Many small, new businesses obtain this
credit when no other form of financing is
◦ Suppliers typically offer this credit to
attract new customers.
22ECD Oct 14 / Lecture 5 / ttl
3) Accounts receivable financing
Short-term financing that involves
the pledge of receivables as a
collateral for a loan.
Accounts receivable bank loans are
made on a discounted value of the
Made by commercial banks.
Notification or non-notification plan.
23ECD Oct 14 / Lecture 5 / ttl
Sale of a business’s accounts receivables
to a factoring company.
Usually the factor will buy the client’s
receivables outright, without recourse,
as soon as the clients creates them by
shipment of goods to customers.
Common in industries such as textiles,
furniture manufacturing, clothing
manufacturing, toys, shoes and plastics.
24ECD Oct 14 / Lecture 5 / ttl
5) Hire purchase
Extended payment scheme entered
into between the entrepreneur/hirer
and owner (equipment manufacturer
or financial institution)
Hirer only needs to pay a small deposit
up front and then make regular
Only on final instalment does the hirer
25ECD Oct 14 / Lecture 5 / ttl
6) Finance companies
Asset-based lenders that lend money
against assets such as receivables,
inventory and equipment.
Often make loans that banks do not.
Interest higher than banks.
26ECD Oct 14 / Lecture 5 / ttl
Equity & debt financing
27ECD Oct 14 / Lecture 5 / ttl