Lesson 3 Midterm.pptx

Financing Venture

Overview

• Starting a business project requires substantial capital.

• One does not need to be a millionaire to embark on entrepreneurial endeavors.

Capital Requirements

1. Fixed Capital

• Definition: The money needed to purchase fixed assets or capital goods.

2. Working Capital

• Definition: Funds required to support day-to-day operations of the business.

3. Growth Capital

• Definition: Capital needed for expansion, diversification, or changing business direction, not related to daily financial needs.

Sources of Capital

Internal vs. External Sources

• Internal Fund Sources: Funds owned by the entrepreneur or the company.

• External Capital: Funds beyond the entrepreneur's personal means.

Formal vs. Informal Sources

• Formal Sources: Organizations authorized by the government to extend financial assistance.

• Informal Sources: Unofficial avenues of financial assistance.

Owner's Equity

• In corporations, the owner's contribution is called equity, evidenced by stockholder certificates.

Long-Term Borrowings

• Organizations that provide financial assistance for longer durations.

Forms of Fund Sources

1. Mortgage

• Pledging property as collateral for loans.

2. Bonds

• Indebtedness of the issuing company promising fixed interest to bondholders.

3. Long-term Commercial Papers

• Issued by reputable large companies as commercial documents.

Short-Term Creditors

• Provide financing for one year or less, act as stand-by credits for entrepreneurs.

Types of Creditors

1. Commercial Banks

• Offer short and long-term financing for viable business projects.

2. Merchandise Suppliers

• Inventory can be procured via cash or credit.

3. Credit Card Companies

• Convenient but often expensive form of financing.

4. Capital Equipment Suppliers

• Offer favorable terms to sell equipment; retain ownership until payment completion.

5. Leasing Companies

• Facilitate procurement of capital items or equipment.

6. Receivable Factors

• Specialized organizations that buy receivables at discount rates.

7. Deferral of Payables

• Employees may defer salaries or benefits during financial crises.

Other Sources of Capital

1. Venture Capital Companies

• Provide funding by purchasing equity in new business ventures with high return potential.

2. Lending Investors

• Licensed organizations providing quick financing with minimal paperwork.

3. Government Institutions

• Special packages for entrepreneurs needing seed capital.

4. NGOs

• Programs focusing on supporting small-scale entrepreneurs and the disadvantaged.

5. Political Sources

• Philanthropic politicians offering grants for self-employment projects.

6. Friends and Relatives

• Common sources for informal funding support.

7. Purchase Order Financing

• Arranged with commercial banks or financing institutions for funding.

8. Employees

• Employees have a vested interest in the company's health.

9. Usurers

• Help small entrepreneurs by providing necessary funds, often for daily needs.

Angel Investors

• Private investors referred to as "angels" that provide startup capital.

The Stock Market and the IPO

• Entrepreneurship may also involve expansion and innovation via Initial Public Offerings (IPOs).

IPO Explained

• IPO means entering the stock market system regulated by the Philippine Stocks Exchange (PSE).

The IPO Process

1. Interfacing with external auditors and completing transaction processes can take 6-18 months.

2. Company officers participate in the process actively.

3. Roadshows help improve company visibility and potential stock price.

Risks in Going Public

• Possible loss of focus and direction for entrepreneurs post-IPO.

• Managing liquidity from the sale can become burdensome.

Borrowing from Banks

• Banks exist primarily to lend money to entrepreneurs.

The C's of Credit

1. Collateral - Required security in the form of property.

2. Capacity - The borrower's ability to repay the loan.

3. Character - The entrepreneur's reputation and personal capability.

4. Contract - All loans must be documented with a defining agreement.

5. Conditions - Terms and conditions of the borrowing agreement.

Using Someone Else's Money

• It is common for entrepreneurs to invest personal capital initially rather than borrow.

• Remaining cash can be essential for future growth or to start anew if initial ventures fail.