Name: Zahra Batool

Fatima Jinnah Women University

Department Of Computer Arts

Home Assignment

Chapter 10

Describe the three sources of personal financing possible available to your proposed
entrepreneurship which you had proposed in financial planning chapter.

Entrepreneurs quite often require starting capital to push their thoughts ahead to where they
can begin their endeavors. Determining the amount of money that is really required is tricky
because that requirement can change as plans evolve. Other challenges include actually
securing the amount wanted and getting it when it is required. If an entrepreneur is unable to
secure the required amount or cannot get the funding when needed, they should grow new
plans. Once a venture starts to make cash sales or it starts to receive the cash earned through
credit sales, it can utilize those resources to support a portion of its activities. Until then, it must
get the cash it needs through different sources. Bootstrap financing is when entrepreneurs
utilize their ingenuity to make their current resources, including cash and time, stretch as far as
possible usually out of need until they can transform their venture into one that outside
investors will discover sufficiently engaging to put resources into. Often, founders have to use
their own money because they have difficulty raising money due to being unknown/ untested.

The importance of getting financing:

Why most new ventures need financing
1: Cash flow challenges:
 Inventory must be purchased, employees must be trained and paid, and advertising must
be paid for before cash is generated from sales.
 Lag between spending to generate revenue and earning income from the firm’s
operations creates cash flow challenges, particularly for new, small, ventures.
 Burn rate: rate at which it is spending its capital until it reaches profitability.

2: Capital investments:
 The cost of purchasing real estate, building facilities, and purchasing equipment typically
exceeds a firm’s ability to provide the funds for these needs all alone.
 Can avoid expenditures by leasing space/co-opting the resources of alliance partners.

3: Lengthy product development cycles:

 Some products are under development for years before they generate earnings. The up-
front costs often exceed a firm’s ability to fund these activities all alone.
Sources of personal financing:

1: Personal funds:
 Involves both financial resources and sweat equity. Sweat value represents the value of
the time and effort that a founder puts into a firm. (Often makes the most difference)

2: Friends and family:

 Often comes in the form of loans or investments but can also involve outright gifts,
foregone or delayed compensation, or reduced or free rent.
 3 rules of thumb:
 Request should be presented in a business-like manner.
 Loan, a promissory note should be prepared, with a repayment schedule, and note
should be signed by both parties.
 Financial help should be requested only from those who are in a legitimate position to
offer assistance.
3: Bootstrapping:
 Finding ways to avoid the need for external financing through creativity, resourcefulness,
thriftiness, cost-cutting, obtaining grants, or some other methods.
 Buy utilized instead of new equipment, coordinate purchases with other businesses,
lease equipment instead of buying, obtain payments in advance from the customers,
minimize personal expenses, avoid unnecessary expenses, such as lavish office space and
furniture, buy items cheaply, but prudently, and share office space, hire interns.

 Pushes practices too far can hold a business back from reaching full potential.

Preparing to raise debt or equity financing:

1: Determine precisely how much money is needed:

 Don’t want to get caught short, or pay for capital it doesn’t need.
 Poor impression when talking to potential lenders, investors when appear uncertain
about amount of money required.
2. Determine the type of financing or funding that is most appropriate:
 Equity financing: exchanging partial ownership of firm usually in form of stock for funding
in return e.g., angel investors, private placement, venture capital, IPOs; not loan- money
received isn’t paid back; 3-5 year investment horizon; liquidity event (occurrence that
converts some or all of company’s stock into cash)- public, find a buyer, merger ; only
fund small percentage of business plans.
 Debt financing- getting loan e.g., commercial banks, SBA guaranteed loans.
3. Develop a strategy for engaging potential investors or bankers:
a) Lead entrepreneurs in new venture should prepare elevator speech/ pitch.
b) Identifying and contacting the best prospects.
c) Engaging potential investors/ bankers by being prepared to provide investor/ banker a
completed business plane and make presentation if requested.
Sources of equity financing:
Primary disadvantage- firm’s owners relinquish part of ownership interest and may lose control
Primary advantage- access to capital/ often offer expertise and assistance investors receive
return on investment through dividend payments and selling stock.
Business angels:
 Individuals who invest their personal capital directly into start-ups.
 Usually about 50 years old, has high income and wealth, well educated, succeeded an
entrepreneur, and invests in companies that are in region where they live.
 Invest between 10k-500k in companies with potential growth of 30-40% per year before
they are acquired/ go public.
 Valuable because of their willingness to make relatively small investments as well as
motivated by more than just financial returns.
 Groups of angels from 10=150 in a local area who meet regularly to listen to business plan
presentations.
Venture capital:
 Is money that is invested by venture capital firms in start-ups and small businesses with
exceptional growth potential?
 Angels tend to invest earlier in life of company, whereas venture capitalists come in later
usually as follow-on funding for businesses originally funded by angel investors.
 Venture capitalist firms are limited partnerships of money managers who raise money in
funds to invest in start-ups and growing firms.
 Investors who invest in venture capital funds are called limited partners.
 Venture capitalists who manage the fund are called general partners - percentage of
profit venture capitalist gets is called the carry.
 Anticipate that 20% or less of investments will be “home-runs”.
 Advantage- venture capitalists are extremely well-connected in business world and can
offer considerable assistance beyond funding.
 Once a venture capitalist makes an investment in a firm, subsequent investments are
made in rounds (stages) and are referred to as follow-on-funding. (seed funding, start-up
funding, first-stage funding, second-stage funding, mezzanine financing, buyout funding)
 Important part of acquiring funding subsidizing is going through the due diligence process,
which refers to the process of investigating the merits of a potential venture and verifying
the key claims that made in the business plan.
 Corporate venture capital: similar to traditional except money comes from corporations
that invest in start-ups related to their areas of interest.
Initial Public Offering:
 Sell stock to the public by staging an initial public offering (IPO).
 IPO- first sale of stock by a firm to the public.
 Any later public issuance of shares is referred toa s a secondary market offering.
 Stock traded on one of major stock exchanges e.g., NASDAQ.

 Why go public?
 way to raise equity capital to fund current and future operations
  IPO raises firm’s public profile. Making it easier to attract high-quality customers, alliant
partners, and employees.
 IPO liquidity event that provides a mechanism for company’s stockholders, including its
investors, to cash out their investments.
 Going public, firm creates another form of currency that can be used to grow company.
 Complicated and expensive, subjects firms to substantial costs related to SEC (Securities
and Exchange Commission) reporting requirements.
 First stage in initiating PO is hiring investment bank ( an institution that acts as an
underwriter or agent for firm issuing securities- acts as firms advocate and adviser and
walks it through the process of going public).
 Preliminary prospectus – describes offering to general public.
 Final prospectus- sets date and issuing price for offering.
 Road show- whirlwind tour consisting of meetings in key cities where firm presents its
business to group of investors.
 Timing and luck play role in PO success.
 Private placement- variation of IPI, which is the direct sale of issues of securities to large
institutional investor.

Sources of debt financing:

 involves getting loan or selling bonds
Loans:
 Single-purpose loan: specific amount of money is borrowed that must be repaid in fixed
amount of time with interest.
 Line of credit: borrowing “cap” is established and borrowers can use credit at their
discretion. Require periodic interest payments.
 Advantages to loans: none of ownership of firm is surrendered/ interest payments are tax
deductible.
 Disadvantages to loans: must be repaid/ lenders often impose strict conditions on loans
and insist on ample collateral to fully protect investment.

Debt financing:
 Commercial banks
 SBA Guaranteed Loans- operates through private-sector lenders who provide loans that
are guaranteed by the SBA.
 Other Sources:
 vendor credit- when vendor extends credit to business in order to allow business to
buy its products/ services up front but defer payment until later
 Peer-to-peer lending- financial transaction that occurs directly between individuals
or peers.
 Factoring- hybrid method for obtaining cash – financial transition hereby business
sells its accounts receivable to third party called a factor, at discount in exchange for
cash.
 Crowd funding.
Creative sources of financing:

 Leasing: written agreement in which the owner of a piece of property allows an individual
or business to use the property for a specified period of time in exchange for payments.
The sufficient benefit of leasing is that it enables a company to acquire the use of assets
with very little or no down payment.

 SBIR is (small business innovation research) and STTR is (small business technology transfer
research) Grant Programs.

 Strategic partners.