MODULE SIX

FINANCING OF ENTERPRISES
Expected learning outcomes
 The concept of financing enterprises
 Sources of financing enterprises
 Challenges in financing enterprises

Introduction
 A large number of small and medium size enterprises (SME’s) have been rapidly
developed in recent period over the world as well as in Tanzania as a result of growth
and expansion of entrepreneurship development.
 An enterprise, whether small or large, performs a number of business functions. These
functions include production, marketing and personnel management. Each of these
functions involves planning, directing, allocating and controlling of human resources.
Finance provides the enterprise with funds for purchasing inputs and for general
expansion. Finance, particularly the working capital, supports the day-to-day activities
of an enterprise.
 One of the key factors in the process of ensuring the development of SME’s, is ensuring
of the needed capital in adequate quantity by appropriate conditions. Most business
enterprises depend on adequate financing to start and grow. 

1. The concept of financing enterprises

 Financing is the act of providing funds for business activities, making purchases or
investing.
 Financial institutions and banks deal with the business of financing as they provide
capital to businesses, consumers and investors to help them achieve their goals.
2.0 Sources of Finance for enterprises 
There are three main sources of capital finance for social enterprises. All have their advantages
and disadvantages and are more or less appropriate according to the stage of development of
your enterprise, its profitability and the scope for involving your community as owners as well as
service users. The sources are:

 Grants, Gifts & Donations

 Loans
 Equity or Investment

i). Grants, Gifts & Donations

 Grants may be essential at start-up, and can help cover costs until income is generated
from trading.
 They can be used to purchase assets to help generate income and they can fund important
but less viable activities.
 However grant funding is only a short term solution, it is often restricted to project costs
and will not cover core costs, and making applications for grant funding can be time
consuming.
 Finally there is a danger that your enterprise will become grant reliant and vulnerable
when funding dries up. 

ii). Loans
 Debt is a liability, and must be repaid at some point in the future.
 The cost of debt finance will vary according to the lender's interest rates and the length of
the loan.
 Some lenders will ask for personal guarantees, not a good idea in a social enterprise. 

iii). Equity or Investment
 Equity is an asset; it is the property of the enterprise and does not have to be repaid.
 Equity finance in social enterprise differs from ordinary share capital.
 There will be limited returns available to investors; there may be an asset lock; investors
may have only limited voting rights - in a co-operative one person one vote rather than
one share one vote)
Other sources of finance in government social institutions (schools)
 Government budget allocation

 Students fees and contributions

 School internal revenue

 Community contributions

 Other income

2.1 Financing community primary schools in Tanzania

Community primary schools are initiated by the communities who commence by building the
schools and local authority supports them by giving those roofing materials and cements. In long
running the schools receive grants from central government to supplements their own revenue
collections. The grants are given in two forms, one for the salaries and the second for the
expenditure. Since the Ministry of Education does not as yet have the capacity to meet all the
demands of its institutions it relies on the other stakeholders such as communities, parents
educational institutions and NGO’s to obtain money for education

2.2. Techniques of financing enterprise

There is a large variety of financing techniques that business and consumers can use to receive
financing; these techniques range from grants to bank loans.
 Have a well Researched and Written Document
Applications for grants and financing both require a well-written and well-researched document.
In the case of a grant, this is a proposal. For financing, it is a business plan.
 Focus
Just as applying for a grant for a non-profit program involves knowing the interests of the
grantors, looking for financing involves knowing the interests of the financiers. For example, if
the non-profit program or service is youth-focused, it is important to find a grantor whose
funding guidelines include supporting youth. When applying for financing or looking for equity
investment for social enterprise, it is also important to understand the particular interests of the
financier. For example, World Bank is a leader in the field of financing social enterprise whereas
banks have little interest in the area.
  Language
It is important to remember that financial language is not a mystery! It is a language and culture
which can be learned. Do not be afraid to ask questions; the worst thing to do is to pretend to
understand for fear of looking ignorant. Most people in the non-profit world are not
knowledgeable about financing.

 Transparency
Grants obtained from community foundations and government is relatively transparent; the
granting guidelines are public, the members of the decision-making body are known, a list of
recipients is publicized and an annual report is issued. Government tendering processes and
evaluation criteria for proposals are public, the value of contracts awarded is available, and the
name of the successful bidder is announced.
Differences
 Relationships
While relationships are important both when looking for grants and when looking for financing,
there is a difference in the degree of the importance. When granting funds for the work of a non-
profit organization the representative of the funding body or government must view the
individuals involved as credible, having integrity and having the ability to successfully manage
the project

Relationships are the key to obtaining financing. These relationships take time to nurture and it is
a good idea to meet with the financial institutions very early in the process. There are a number
of reasons for this:
• the financier gets to know you,
• you get to know the financier,
• if you keep the person informed, you will get very valuable free feedback and
possibly technical assistance, and
• if the individual sees financing potential, he or she may become an advocate for the social
enterprise. This can lead to financing strategies that you may never have imagined.
2.3. Things to conceder before looking for financing
There must be:
• a clear understanding of legal structure of the social enterprise
• clear financial objectives
• carefully prepared financial documents
• a capable financial manager
Each of these is described below:

 Legal Structure
In order to use this guide, it is important to understand the legal structure of the social enterprise
in question; its borrowing capabilities, and investment possibilities. The business structure
chosen for a particular social enterprise is a critical part of the development of the business plan.

 Financial Objectives
A well-written business plan will articulate the type of financing needed. The business plan
should contain carefully researched and accurate financial objectives and financial statements.
When developing a business plan for a social enterprise, there will be different financial
objectives at different stages. For example,
• At the idea stage, the financial objective may be to find the resources to conduct a
feasibility study.
• At an early stage, the financial objective may be to find resources to build technical
capacity.
• At the start up phase, the financial objective may be to acquire the equipment needed.
• As the business develops, the financial objective may be to break even.
• Later in the business development cycle, the financial objective may be to achieve a
profit (with or without borrowed funds).
• As the business grows, the financial objective may be to increase sales through more
sophisticated marketing strategies.
Each of these financial objectives requires a different financial strategy. A social enterprise will
have a number of different financial strategies through the life cycle of the business.
  Financial Documents
Financial strategies are based on the information provided by certain essential financial
documents. These financial documents are an essential part of a business plan. The figures used
in these documents are often projections based either on past performance or on market research.
Financial documents using projections are called Proforma.

• Income Statement: A financial performance report which sets out projected revenue and
projected expenditures of the social enterprise expected during a specific timeframe.

• Cash Flow Statement: Shows the flow of cash into and out of the social enterprise
during a specific period. It includes when, and where, the money will come from and
what it will be spent on. This is the most realistic picture of the viability of the social
enterprise as it indicates how much cash will be available at any given time.

• Break-even Analysis: This shows the amount of business the social enterprise must do
in order to cover costs. At the break-even point, there is no loss or profit to the social
enterprise.

• Balance Sheet: This is a status report, or “snap shot’ of the financial state of the social
enterprise business at a given point in time. It shows what the social enterprise owns
(assets) what is owed (liabilities) and what is left over (equity).

These documents should be prepared very carefully because they are the key to the success of the
social enterprise and will be scrutinized by everyone approached for financial support.

 Capable Financial Management

Managing the finances of a business is substantially different from managing the finances of a
nonprofit organization. It is critical that the social enterprise has sound financial management.
The financial manager of a non-profit organization developing a social enterprise may have the
required expertise. If he or she does not, financial management capacity can be developed. This
can be achieved in a number of ways such as,
• training the current financial manager,
• Recruiting a board member or advisory committee member with the necessary skills,
partnering with an organization such as BC Technology Social Venture Partners whose
volunteers can provide financial management skills, or contracting with a financial
manager.
• Do not start up a social enterprise until this essential expertise is in place.

At different times in the development of a social enterprise there will be various a needs for
capital, such as:
• to write a business plan
• for fixed assets, for example premises, machinery, equipment etc
• for startup costs, for example marketing campaigns

3. Challenges in financing enterprise

 Poor management of the public financing system.

 Late and unpredictable financial transactions.

 Complex system of financial disbursement.

 Embezzlement of the capitation grant

 Misappropriation of student capitation grants

 Weak inspectorate system.

 Absence of education regulatory authority.

 Weak local communities financing process ownership.

 Inflation.
 Poor planning at local government level.

 Inadequate number of trained teachers to bring teacher-pupil ratio to 1:45.

 Corruption.