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Chapter Overview

  • Chapter Title: Financing an Entrepreneurial Business

  • Focus: Understanding various sources and methods of financing for new businesses.

Learning Outcomes

  • LO 1: Determine the capital requirements of a new business.

  • LO 2: Explain different short-term sources of finance.

  • LO 3: Explain different medium-term sources of finance.

  • LO 4: Explain different long-term sources of finance.

  • LO 5: Identify where to obtain finance for the business.

  • LO 6: Understand the workings of the venture capital market.

  • LO 7: Explain the role of crowdfunding in business financing.

  • LO 8: Understand how to attract investors.

8.1 Introduction

  • Finding finance is a significant challenge for entrepreneurs.

  • Understanding available sources of finance and requirements from institutions like banks and investors is essential.

  • Example: WeBuyCars showcases practical applications of financing strategies.

8.2 Determining Financial Requirements

  • Key Steps to Determine Financial Needs:

    1. Sales Projections: Estimate future sales, revenues, and expenses.

    2. Investment Needs: Assess required investments in current and fixed assets to support sales.

    3. Financing Needs Evaluation: Determine financing requirements throughout the planning period.

Financial Planning Process Components

  • Sales Forecast: Prediction of future sales figures.

  • Capital Expenditure Budget: Planning for large asset purchases.

  • Profit Plan: Estimation of profit by subtracting expenses from income.

  • Cash Budget: Tracking of cash inflows and outflows.

  • Income Statement & Balance Sheet: Overall financial condition.

8.3 Sources of Short-Term Finance

  • Definition: Repayable within 12 months.

  • Examples:

    • Trade Credit: Credit extended from one business to another.

    • Bank Credit: Overdraft facilities linked with current accounts.

    • Other Sources: Less common options like bills of exchange, acceptance credits, factoring, customer advance payments, etc.

8.4 Sources of Medium-Term Finance

  • Definition: Repayable between one and three years.

  • Examples:

    • Instalment Sale: Payment of purchase price in instalments.

    • Leasing Finance: Leasing goods for a fixed sum.

    • Medium-Term Loans: Loans with a repayment period of 24-60 months for working capital or fixed asset acquisition.

8.5 Sources of Long-Term Finance

  • Definition: Funding for up to the entire lifespan of the business.

  • Examples:

    • Equity Capital: Initial capital contributions, categorized differently based on business type (sole proprietorship vs. corporation).

    • Debentures: Loans from investors via issued negotiable bonds.

    • Retained Earnings: Profits reinvested into the business.

    • Long-term Loans/Mortgage Bonds: Financing provided against immovable property.

8.6 Institutions Supporting Business Financing

  • Key Institutions include:

    • Commercial Banks.

    • Merchant Banks.

    • Business Partners.

    • Small Enterprise Finance Agency (sefa).

    • Industrial Development Corporation (IDC).

    • Local Business Support Centres.

8.7 Informal Sources of Finance

  • 3 Fs: Family, Fools, and Friends as initial funding sources for startups.

  • Stokvels: Community saving systems with various objectives like savings clubs, loan stokvels, and investment clubs.

8.8 Venture Capital and Private Equity Market

  • Private Equity: Capital from investors such as pension funds and families.

  • Venture Capital: Early-stage financial support from dedicated organizations or angel investors.

8.9 Crowdfunding

  • Definition: Funding raised from a large number of individuals, often via social media.

  • Benefits: Expands investor pool beyond traditional circles, encouraging entrepreneurship.

8.10 Attracting Investors and Private Placement of Shares

  • Key Stages:

    1. Making Contact: Establishing awareness between entrepreneur and investor.

    2. Deal Screening: Evaluating proposal fit.

    3. Deal Evaluation: Analyzing market conditions and competitive landscape.

    4. Deal Structuring: Outlining investment details for returns.

    5. Post-Deal Activity: Maintaining investor involvement post-investment.

8.11 The Cost of Raising Finance

  • Many entrepreneurs avoid external debt, choosing to grow with internal funds.

  • Cost Aspects:

    • Upfront Costs: Preparation proposals with input from advisors.

    • Marketing Costs: Including travel, ads, and time lost from business.

    • Back-End Costs: Fees associated with financial institutions or intermediaries.

8.12 Initial Public Offering (IPO)

  • IPO often seen as a significant step for raising capital.

  • Requirements: Businesses must meet specific criteria set by stock exchanges, including profit history.

8.13 The National Credit Act 34 of 2005

  • Aims to protect consumer rights concerning credit agreements.

  • Ensures better-informed consumer decisions when acquiring services or goods through credit.