ENHANCING ONE’S OWN CREATIVITY

1. Occupying the mind everyday: Feed your mind with inputs every day.
This can be done by being conscious of things happening in your
environment.
2. Allow yourself to be creative: Commit yourself to developing your
creativity. The first step is to fully devote yourself to developing your
creative abilities. Do not put off your efforts. Set goals, seek the help of
others and put time aside each day to develop your skills.
3. Don’t be a functional fixed person: You have to recognize that problems
have multiple solutions. Therefore, in your approach to a problem try
looking for a variety of solutions. Instead of simply going with the first idea
you take, take the time to think of other possible ways to approach the
situation. This simply activity is a great way to build both your problem
solving and creative thinking skills.
4. Fight your fear: Recognize the creative power of mistakes. Don’t be a self-
censorship person. The fear that you might make a mistake or fail in your
efforts can paralyze your progress. When you find yourself harboring such
feeling, remind yourself that mistakes are simply part of the process. While
you may occasionally stumble on your path to creativity, you will eventually
reach your goals.
5. Develop your imaginative abilities: Play game, solve puzzles etc. Attempt
this puzzle; A hunter see ten birds standing on a tree. Then he point his
gun toward the birds, nine of the birds decide to fly. How many birds do
we have left on the tree? When we play we create an environment
that allows us to take risks while feeling secure. This stimulates our thinking
and often produces wonderful results.
6. Record your thoughts and ideas: Record the thoughts and ideas that occur
to you at anytime – in the lecture hall, when taking a walk, bathing, talking
with friends, playing, when working etc.
7. Be an attentive person: Listen to people carefully and pick ideas from the
sayings of people. Consider these axioms ‘Go to the ant, you sluggard;
consider/learn its ways and be wise’.p6:6. ‘Every little counts’. Intelligent
people are always ready to learn. Their ears are open for knowledge.p18:15
8. Involve yourself in activities that can make you relax: Take some time
off for holidays and spend holidays at quite places, where you can admire
the wonderful creation of God. This process will go a long way to unleash
your creative potential.
9. Be a curious person: Be hungry for knowledge. One common road block to
developing creativity is the sense that curiosity is an indulgence. Rather than
reprimanding yourself, reward yourself when you are curious about
something.
10.Be willing to take risks: When it comes to building your creative skills, you
need to be willing to take risks in order to advance your abilities. While your
efforts may not lead to success every time, you will still be boosting your
creative talents and building skills that will serve you well in the future.
11.Build your confidence: Insecurity in your own abilities can suppress
creativity, which is why it is important to build confidence. Make note of the
progress you have made, commend your efforts and always be on the
lookout for ways to reward your creativity.
12.Make time for creativity: You won’t be able to develop your creative
abilities if you don’t make time for them. Schedule some time each week to
concentrate on some type of creative project.
13.Have optimistic view of life: Positive moods can increase your ability to
think creatively. Research has established this fact; a 2006 study published
in the proceedings of the National Academy of Sciences confirmed this
view. Focus on eliminating negative thoughts/ cynicisms and pessimisms
and skepticism that may impair your ability to develop strong creative
skills.
14.Look for sources of inspiration: Never expect creativity to just happen.
Look for new sources of inspiration that will give you fresh ideas and
motivate you to generate unique answers to questions. Read a book, visit a
museum, listen to your favorite music or engage in a lively debate with a
friend. Utilize the technique that works best for you.
15.Try the ‘Six Hats’ Technique: The ‘six hat’ technique involves looking at
a problem from six differing perspectives. By doing this you can produce
more ideas than you might have had. In most cases we only look at a
situation from one or two points of view.
The six hats are:
 RED HAT: Look at the situation emotionally. What do your feelings
tell you?
 WHITE HAT:Look at the situation objectively. What are the facts?
 YELLOW HAT: Use a positive perspective. Which elements of the
solution will work?
 BLACK HAT: Use a negative perspective. Which elements of the
solution won’t work?
 GREEN HAT: Think creatively. What are some alternative ideas?
 BLUE HAT: Think broadly. What is the overall solution?
 ENHANCING CREATIVITY IN THE SOCIETY

1. Encourage diversity – allow people to be dynamic.

2. Expecting and tolerating failure and mistakes.
3. Encouraging curiosity – don’t shut up children who ask too many questions.
4. Problems should be seen as challenges
5. Provision of creativity training schools or centers
6. Recognizing and rewarding creativity.
7. Redefining educational curriculum to foster creativity at all levels.

INNOVATION:

 Innovation is the process by which entrepreneurs convert opportunities into

marketable ideas. It is the successful implementation of creative ideas within
an organization. It is thinking creatively about something that already exists
(e.g., tape, walkman and CD player are all innovations on the phonograph).
 Innovation is the implementation of something new. It is about people using
new knowledge and understanding to experiment with new possibilities in
order to implement new concepts that create new value.
 Innovation is the sifting refining and implementation of ideas – putting
ideas into action.
 Innovation is the successful exploitation of ideas, which may be entirely
new ideas, reworking of an old idea or the transferring and embedding of
existing ideas into a new setting.
SOURCES OF INNOVATION:

 Unexpected occurrences
 Incongruities
 Process needs
 Industry and market charges
 Demographic change
 Perceptional changes
 Knowledge –based concepts.

The Entrepreneurs Innovation Process

 Analytical Planning: Carefully identifying the product or service features,
design as well as the resources that will be need.
 Resources organization: obtaining the required resources, materials,
technology, human or capital resources.
 Implementation: Applying the resources in order to accomplish the plans
 Commercial application: The provision of value to customers, reward
employees, and satisfy the stake holders.

In effect, creativity and innovation go hand in hand and are integral part of
entrepreneurship.
 TYPES OF INNOVATION
A. Invention: The creation of a new (novel) product or service, something that
has not been tried before.
B. Extension: The expansion of an existing product or service. This would
mean that entrepreneur takes an existing idea and applies it differently e.g. a
new use for a product.
C. Duplication: Copying (replicating) an existing product or service and then
adding the entrepreneur’s own creative touch in order to improve it.
D. Synthesis: A combination of more than one existing product or services into
a new product or service. This means several different ideas are combined in
one new product or service.

CREATIVITY VRS INNOVATION

According to Theodore Levitt, (1963):

Creativity = Ideas

Innovation = Ideas + Action

Since business is a uniquely ‘get things done’ institution, creativity without action-
oriented follow-through is a uniquely barren form of individual behavior. Actually,
in a sense, it is even irresponsible.
REASONS FOR STARTING UP NEW BUSINESS
The reasons for entrepreneurs starting up a new business are a lot. A research by
Birley and Westhead (1994) reported seven components of new venture
motivation:

1. The need for approval

2. The need for independence
3. The need for personal development
4. Welfare (philanthropic) considerations
5. Perception of wealth
6. Tax reduction and indirect benefits
7. Following role models

Although researchers agree many reasons exist for starting a business, the
entrepreneurial motivations for individuals usually relate to the personal
characteristics of the entrepreneur, the environment and the venture itself.

ADVANTAGES AND DISADVANTAGES OF STARTING

YOUR OWN SMALL BUSINESS
ADVANTAGES

1. Creation of the owner – the owner has the freedom of choice over what the
business does, how it operates and what its values are
2. Control of the owner – the owner has maximum control over the affairs of
the business
3. Satisfaction of the owner – there is the inherent satisfaction of success
resulting from the skill and effort of the owner
4. Clean – the business starts with no backlog of problems.
5. Less funds required – a new business start-up will cost less than business a
similar existing business.
6. Match between founder and enterprise – new business founders would
ensure that their individual strengths are well used and their weaknesses
 minimized, by choosing a business well matched to their own qualities and
experiences.

DISADVANTAGES

1. Unproven idea – the new business idea might be creative, but may not work.
2. High failure rate – the failure rate of new business start-up is high; less than
50% is said to survive in the first five years.
3. No market share or goodwill – new business start-up would have the
problem of establishing its name from scratch; the goodwill in an established
business name or loyalty of existing customers would take some time to
build up.
4. Barriers to entry – there are many barriers to market entry. Among other
things, premises has to be found, legislation considered and other obstacles
overcome before trading begins.
5. Difficult to finance – banks and other lenders are keener to lend money to
successful existing business than to new concepts/businesses
6. Hard lonely work – business start-ups involve unsociable working hours
linked to feeling of working alone.

BUYING A SMALL BUSINESS

An entrepreneur can establish a business venture by either starting your own or by
buying an existing one. We shall focus on the opportunities for buying an existing
business.

OPTIONS FOR SMALL BUSINESS BUYERS

Some of the options available to the entrepreneur to become involved in the

existing business include the following
 A. OUTRIGHT PURCHASE

A prospective entrepreneur might choose to purchase an existing business wholly,

as a means of market entry. An on-going small business owner could also decide to
expand by buying another small business.

B. BUY-IN

A buyer might not wish to buy an on-going business entirely. Instead they might
want to buy into an existing business and become a new partner or a shareholder.
This is more commonplace in professional practices such as doctors, solicitors and
accountants.

C. BUY-OUT

This is where current management buy a business or a significant part of it.

Although buy-outs could occur for small firms, large firms are often the sellers.

D. BUY-IN MANAGEMENT BUY-OUT

Buy-in Management buy-out (BIMBO) is a variation of management buy-out

concept. BIMBO combines outside and inside management in the purchase of a
firm. It is the belief that the risk of buying into a firm from outside could be
minimized if the existing management of the firm are also involved.

THE RIGHT WAY TO BUY A BUSINESS

Buying an existing business should not be approached haphazardly in view of the
risk involved. To avoid costly mistakes, the prospective business owner should
follow a logical, methodical approach such as follows:

1. Analyze your skills, abilities and interests – Analyze your skills, abilities
and interests to determine what kind of businesses you should consider. That
is conduct a self-audit to determine your preferred or ideal business.
2. Prepare a list of potential candidates – Typical sources for your search for
an acquisition candidate include the following: newspapers & trade journals,
industry contacts, business brokers, investment bankers, networking (social
and business contacts).
3. Investigate the potential candidates and evaluate the best ones –
Investigate the list of prospective candidates in terms of the following: What
are the company’s strength and weaknesses? Is the company profitable?
Who are the major competitors? How large is the customer base? Are the
current employees suitable? What is the physical condition of business? Etc
4. Explore financial options – After succeeding in placing a value on an
existing business, the next challenging task in closing a successful deal is
financing the purchase. A deal is typically structured so that the buyer makes
a down payment to the seller, who then finances a note for the balance. The
buyer makes regular principal and interest payment until the note is paid off.
5. Ensure a smooth transition – Once the parties strike a deal, the challenging
task in making a smooth transition comes up. Zimmerer and Scarborough
(1995), suggest that a business buyer should do the following to ensure
smooth transition:
 Concentrate on communicating with employees with the aim of
reducing anxiety and uncertainty
 Be honest with employees – avoid telling them what they want to
hear.
 Listen to employees – since they have the intimate knowledge of the
business and its strengths and weaknesses and usually can offer
valuable suggestions.
 Consider asking the seller to serve as a consultant until the transition
is complete. The previous owner can be a valuable resource.
ADVANTAGES OF BUYING AN EXISTING BUSINESS
Some of the possible advantages include the following:

1. Overcome barriers to market entry – In situations where there are

significant barriers to market entry for a small business entrant, purchasing a
thriving business might be the most feasible alternative.

2. Buying immediate turnover and income – Purchasing a thriving business

at an acceptable price increases the likelihood of success. Buying immediate
turnover and income could be important especially when the buyer has no
other sources of income.

3. Existing market share – In cases where the existing business controlled a

significant percentage of the desired market then it might be favourable to
buy into them rather than compete.

4. Existing assets including equipment and staff – Acquiring and installing

new equipment and staff can be financially tremendous and it might be more
appropriate to focus resources and energy on the market place through an
existing business.

5. Goodwill with existing customers – Buying an existing business with a

good customer base, which is a reflection of the viability of the business,
would take some of the risk out of small business ownership. Also it could
provide a good base for future growth.

6. Existing track record – If previous owners have succeeded to establish a

good track record, in terms of trade credit relationships, the new owner
could take advantage of it.

7. Insider knowledge – The advantage of insider knowledge only usually

applies to situations where the existing management is involved in the
purchase.
DISAVANTAGES OF BUYING AN EXISTING BUSINESS
Some of the disadvantages include the following:

1. Potential ill will – The previous owner may have created ill will. The
business may look great on the surface, but customers, suppliers, creditors,
or employees might have extremely negative feelings about it.

2. Buying possible liabilities with assets – Even if only assets are purchased,
liabilities can still be attached to them – which may not be recognized at the
time of the purchase.

3. Employee inherited with the business may not be suitable – The present
employees may not suit the new owner’s needs, if she/he plans to effect
changes in the business.

4. Risk in intangible assets – The goodwill inherited in an existing business

can disappear very quickly if a new owner makes inappropriate changes. If
the previous owner represents a significant part of the goodwill, it would go
with them when they leave.

5. Equipment and facilities may be obsolete or inefficient – the equipment

may have been well suited to the business the buyer purchased, but not to
the business the owner may want to build. Modernizing equipment and
facilities is usually expensive.

6. The location may have become unsatisfactory – The location of the

existing business might have been deemed ideal, but it might become
obsolete as market and demographic trends change.

7. The existing business may be unprofitable – A business may be for sale

because it has never been profitable. Such a situation might be disguised –
owners could employ various creative accounting techniques that make the
firm’s financial picture appear might brighter than it really is.

8. Diminish sense of achievement – Buying an existing business could

diminish the entrepreneur’s sense of achievement since it is not all his/her
own work. This situation may reduce the motivation to make the business
succeed.
In sum, we have discussed the different options available to the entrepreneur to get
involved an existing business. These include: outright purchase, buy- in, buy-out,
buy in management buy- out. We also considered the steps to follow in purchasing
the business and the advantages and disadvantages for buying an existing business.

EXAMMING FINANCIAL DATA (BUSINESS)

A. Cash flow statement (sources of and uses of funds)
B. Income statement (profit and loss account)
C. Balance statement

a. Under sources funds: Capital (equity), surplus income, debt. Other sources
includes, long term borrowing which is usually 1yr or above.

b. income statement/ profit and loss gives information about the company’s sale,
cost of sale, net profit and profit or gross profit. This provides information about
how profitable the company.

c. Balance sheet (assets and liabilities): Asset includes current and fixed asset such
as stock/inventory, cash, cash equivalents, land, buildings, equipment.

Liabilities (debt) includes long term and short term loans.

NB. Current and fixed assets are tangible asset.

Business is basically a collection of asset

VALUING THE BUSINESS

The owner of a business or shares in an unquoted business may wish to sell all or
part of the business or of his/her holdings. In these circumstances, price is
determined by negotiations between the prospective buyer and seller. However, a
theoretical present day value of a business can be obtained by using one of a
number techniques through what is known as ‘Business Valuations’.

BASES FOR BUSINESS VALUATION

1. ASSET BASIS OF SHARE/BUSINESS VALUATION
By this method of valuation, the value of a business is equal to the net tangible
assets. Intangible assets is excluded, unless they have a marketable value.

2. SUPER – PROFIT METHOD

It is sometimes suggested that the earnings stream of a business can be divided into
two elements: the first is the expected return on the value of the tangible assets
employed in the business; the second is an additional amount known as super-
profit. The super-profit is the difference between maintainable profit and the
expected return on the tangible assets employed. The procedure for calculating the
super-profit is given below:

i. Value the net assets of the business on a going concern basis

ii. Establish an acceptable rate of return on the assets
iii. Find the annual profits that would be assumed to result from the use of
the assets so as to earn the rate establish in ii above.
iv. Establish the profits that can be expected to be earned by the business
over the next few years
v. Deduct the acceptable profit figure in iii from the estimated profits in iv.
If the estimate is higher the difference is regarded as the super-profit
vi. Multiple the super-profit by a factor to be agreed (say 3 or 5) to represent
the number 3of years’ super-profits being purchased
vii. The value of the business is i plus vii, which is the value of the net assets
plus five years’ purchase of super-profits.
The value of the super-profits (the difference between the purchase price and the
value of the assets acquired) would be attributed as goodwill.
 3. BREAK-UP VALUATION
This valuation technique looks on a business as a collection of assets which may be
sold off piecemeal, with the owners receiving any residue after all of the
contributors of finance have been reimbursed. The procedure for calculating the
break-up value of the owners interest in the business are:

i. Estimate the sale proceeds of the individual assets

ii. Estimate the liquidation costs and identify the liabilities
iii. Find the value of ownership interest by deducting ii from i.

4. GOING CONCERN VALUATION

A company is a collection of assets that has been brought together with the aim of
producing profits that accrues to ownership. It also provides a return for those who
input other factors, such as employees and providers of debenture or overdraft
finance, who are rewarded by earned income and interest respectively. To value an
entity as a going concern is to assume that the business will continue to operate
with substantially the same combination of assets, employees and management as
previously. Two approaches are examined below.

a. BOOK VALUES
A venture’s book value is calculated from its balance sheet, which contains the
values of assets and liabilities as shown in the books of account. The entries in the
books are normally made at historical cost, less accumulated depreciation in case
of fixed assets other than freehold land.

b. REPLACEMENT COST
To make a more useful assets-based valuation, assets must be valued at their
replacement costs. A person who considers buying an existing business has the
option of assembling for himself an identical collection of assets. The maximum
price the buyer is willing to pay is calculated by ascertaining, in physical terms, the
assets owned by the company and then, possibly with expert advice from a
professional valuer, estimating their replacement cost.

SOURCES OF FINANCE
Sourcing finance to start or expand a business has been a difficult task for most
entrepreneurs and SME’s. For many small firms certain sources such as stock
exchange are not available. Small firms also face difficulties raising certain types
of finance such as long term loans.

This has resulted to a financing gap for small and medium-sized firms. The
existence of a finance gap will arise because demand from SME’s is greater than
the willingness of financial institutions to supply the finance at current market
conditions.

REASONS FOR CONTINUED EXISTENCE OF

FINANCE GAPS
1. It is uneconomic to issue shares for relatively small amounts of equity on
the stock exchange.
2. Difficulties can exist in getting a listing on the stock exchange.
3. Venture capitalists require high rates of return because they are assuming
higher risks than banks. Only a few entrepreneurs with high growth firms
will meet the high rates of return required by venture capitalists.
4. Venture capitalists will apply a due diligence procedure to any proposition
that is been considered for investment. This will take a considerable period
of time and only a small proportion of applications eventually receive
funding after due diligence procedure.
5. Venture capitalists also require an exit route for the sale of their
shareholding after a period of time – 5years. As a result VC will seek high
growth entrepreneurial concerns that can be turned within a short period of
time into public companies and provide an initial public offering (IPO) as
an exit route.

TYPES OF FINANCE
There are two major types of finance available to the entrepreneur namely; debt
financing and equity financing.

1. DEBT FINANCING

Debt financing comprises those funds the entrepreneur or business has borrowed
and must repay. Corporate debt repayment, generally, take the form of interest and
capital repayment.

The cost of debt finance is less expensive to the firm than equity finance. First, the
cost of raising debt finance is lower than equity finance. Secondly, the rate of
return expected to attract debt investors is less than for equity investors.

Institutions providing debt finance often try to minimise the risk of non-payment
by first scrutinising the cash flow or earning ability of the firm. Also as a back-up
they often require that the loan be secured against assets owned by the business-
referred to as collateral security.

SOURCES OF DEBT CAPITAL include:

bank borrowing, trade credit, hire purchase, leasing, bills of exchange and
bonds.

 BANK BORROWING

Borrowing from the bank may take the form of overdraft, term loan and
syndicated loan facility. For most entrepreneurs and SME’s banks remains the
main source of externally raised finance. Borrowing from a bank is attractive for
small firms because it is quick, flexible, and easily accessible/available and has
low administrative cost.

Theoretically, banks face issues in assessing loan applications from

entrepreneurs. These challenges arise in any investment situation where
providers and borrowers have different set of information. For banks, there are
two main problems namely adverse selection and moral hazard.

Adverse selection occurs when either the bank provides finance for a venture
that subsequently fails or the bank refuses finance for a venture that would have
been successful. The difficulty here is that the information required by the bank
to assess perfectly the risk of the proposition might be expensive to obtain.
However, it can be argued that banks should reduce the mistakes they make
since they should have the skills and resources necessary to increase the
frequency of correct decisions.

The problem of moral hazard occurs when the entrepreneur uses the bank loan
on expenses other than the purpose for which it was obtained. Thus there is no
guarantee that the entrepreneur will act in the best interest of the bank.
Therefore, moral hazard is a monitoring problem for the bank and, for relatively
small amount of finance; it is not economic for banks to monitor performance
closely. For this reason banks will usually require security which means that
entrepreneurs without sufficient collateral security will fall into the debt gap.

It is possible to argue that these problems are likely to produce credit rationing –
insufficient credit available for all sound propositions/applications.

For most companies and entrepreneurs, banks remain the main source of externally
raised finance. Generally, borrowing from a bank is attractive for firms for the
following reasons:

 It is quick. Key provisions can be worked out speedily and the funding
facility can be in place in a matter of hours.
 It is flexible. Banks are better equipped and willing to change the terms of
the lending to suit the financial circumstances of the firm (debtor).
 It is available to small firms.
 Administrative and legal costs are low.
Bank borrowing may take the form of overdraft, term loan or syndicated loan
facility.

 OVERDRAFT
Overdraft facilities are usually arranged for a period of few months or a year
but can be rolled over for many years. It is usually flexible because the
borrowing firm is not restricted to state the exact amount and duration but
can borrow up to a stated amount. Also once the amount is no longer
 required they can be quickly repaid without suffering a penalty. It is also
cheap in terms of interest charged. The major drawback is that the bank
retains the right to withdraw the facility at short notice.

 TERM LOAN
A term loan is a loan of a fixed amount for an agreed time and on specific
terms. They usually range between three and seven years but can be for
twenty years. The specific terms will include provisions regarding the
payment schedule. This arrangement may reflect the cash flow of the firm or
project. For example, a balloon payment structure is one where only a small
part of the capital is repaid during the main part of the loan period, with the
majority repayable as the maturity date approaches. A bulletrepayment
arrangement provides for all the capital to be repaid at the end of the loan
period.
Not all term loans are drawn in a single lump sum at the time of the
agreement. An instalment arrangement is sometimes made. The interest
charged can be either at fixed or floating rates and the borrower will pay an
arrangement fee which will depend largely on the relative bargaining
strength of the two parties.

 SYNDICATED LOANS
For large loans a single bank may not be willing or able to lend the whole
amount. In a syndicated loan, few banks provide the whole loan with each
bank contributing a portion of the overall loan.
The bank originating the loan will usually manage the syndicate and is
called the lead manager (there might be one or more lead banks). The other
contributing banks are called participating banks. The managing banks
underwrite much of the loan – guaranteeing to provide the funds if the other
banks do not step forward.

 TRADE CREDIT
The simplest and most important source of short-term finance for many
firms is trade credit. Firms are supplied goods and services that can be used
to produce income before the invoice has to be repaid. Most firms may
require references from the previous suppliers as well as the bankers of the
 beneficiary firm vouching for their trustworthiness before trade credit is
granted.

 FACTORING
Trade credit brings a burden to the supply firm’s finance. Factoring enables
the firm to raise funds using its outstanding invoices (debtors). The firm
receives about 80-90% of the value of the invoice from the factor. This
arrangement is done with the understanding that when invoices are paid by
customers the proceeds will go to the factor. Factoring is more appropriate
for overcoming short term cash flow issues.

 HIRE PURCHASE
With hire purchase, the finance house/firm buys the equipment and allows
the hirer firm to use the equipment in return for a series of regular payments.
While the monthly installments are still being made, the Hire Purchase
Company has the satisfaction and security of being the legal owner and so
can take repossession if the hirer defaults on the payments. At the end of the
contract or on the payment of the last installment, the Hirer Company
becomes the owner either automatically or on the payment of a modest
option- to- purchase fee.
The advantages of hire purchase include:
 Small initial capital outlay.
 Easy to arrange- usually at the point of sale.
 Certainty- unlike overdraft it cannot be withdrawn provided contractual
payments are made.
 Hire purchase is often available when other sources of finance are not.
 Fixed-rate finance- in most cases the payments are fixed throughout the HP
period.
 Tax relief- interest payments are deductible when calculating taxable
profits.

 LEASING
 Leasing is similar to HP in that an equipment owner (the lessor) conveys the
right to use the equipment in return for regular rental payments by the
equipment user (the lessee) over an agreed period of time. The key
difference is that unlike HP the lessee never becomes the owner.
It is important to distinguish between Operating leases and Finance leases.
Operating leases commit the lessee to only a short -term contract. It does not
last for the entire useful life of the asset and the finance house bears the risk
of ownership (repairs and obsolescence). Under Finance/Capital lease, the
finance company expects to recover the full cost of the equipment plus
interest over the period of the lease. Despite the absence of legal ownership,
the lessee will have to bear the risks and rewards that normally go with
ownership (repairs, insurance and obsolescence).
All the HP advantages apply. The additional advantage of operating leases is
the transfer of obsolescence risk to the finance provider.

 BILLS OF EXCHANGE
Bills of exchange are normally used in overseas trade. The seller of goods to
be transported to a buyer in another country frequently grants the customer a
number of days in which to pay. The seller will draw up a bill of exchange –
that is a legal document showing the indebtedness of the buyer. It is then
forwarded to and accepted by the buyer. This means that the buyer signs a
promise to pay the stated amount on the due date. Bills of Exchange allow
the buyer to enjoy the benefits of trade credit in overseas trade.

 BONDS
A bond is a security (a certificate of creditorship with right to
interest/dividend) that represents a debt owed by the issuer to the investor. In
other words, a bond is a long term contract in which the bondholder lend
money to the issuing company in return for series of interest payments,
known as coupons, until the bond matures. At maturity the bondholder
receives a specified principal sum called the par, face or nominal value of
the bond. This is usually £100 in the UK and $1000 in the USA. The
maturity is generally between 7 and 30years although a number of firms
have issued 100year bonds.
 Bonds can be traded in a secondary market (organized exchange or over–
the-counter exchanges). Therefore the bondholder does not have to hold the
bond until the maturity/ redemption date.
The most secured type of bond is called a debenture. They are usually
secured by either a fixed or floating charge against the firm’s assets. A fixed
charge means that specific assets are used as security that, in the event of
default, can be sold at the insistence of the bondholder and the proceeds used
to repay them.

2. EQUITY FINANCING
Equity refers to the ownership of the firm. In other words, equity capital is the
owner(s) funds in the business. As owners of the firm equity investors have the
right to exercise control over the firm. Also if the firm does well, there is no limit
to the size of claim equity investors have on profits.

Equity capital is risk capital. Equity investors are the last in the queue to have
their claims met. When the firm is wound up, employees, tax authorities, trade
creditors and lenders all come before equity investors.

SOURCES OF EQUITY CAPITAL

The sources of equity capital usually available to the entrepreneur and the small
firm include personal equity and venture capital. The personal equity of the
entrepreneur usually may consist of savings or perhaps money raised from
family and friends – referred to as the 3F’s, (founder, family and friends), of
small firm finance.

 VENTURE CAPITAL may be defined as financial investment in

unquoted companies, which have significant growth potential with a view
to yielding substantial capital gains in line with additional risk and
illiquidity of an investment which cannot be freely traded during the
lifetime of the investor’s commitment to the business. VC is thought to fill
the gap between the capital provided by the founder, family and friends
 and the significant amounts required for a stock market listing. The
objective of venture capital is to achieve a high return on the investment in
the form of capital gain through an exit, usually achieved by the sale of
equity.

Within this broad framework, a number of types of venture capital are

commonly identified as described below.

 Institutional venture capital (or formal venture capital)- These are

private firms made up of full -time professionals who raise finance from
pension funds, banks, insurance companies and other financial institutions.
They provide funds for new, inexperienced but potentially high growth
unquoted firms.
 Business angels (informal venture capitalists)- These are wealthy
private individual usually with substantial business and entrepreneurial
skills who make risk investments in start-up or expanding firms which
they have no family connection. Business angels are often retired senior
executives of large companies or entrepreneurs who have sold their
companies and wish to invest their money.
 Corporate venture capital (or corporate venturing)- These are minority
investments made by large companies in smaller enterprises for a
principally strategic ( such as gaining a window on new technologies)
rather than an exclusively financial motive.
 Public sector venture capital- While governments play a role in
encouraging private sector venture capital – through policy instruments
such as tax incentives – may occasionally act directly as provider of
venture finance. However, the trend is emphatically towards a hybrid i.e.
public – private sector partnerships.
FINANCIAL PREPARATION FOR ENTREPRENEURIAL VENTURE

SOURCES OF FINANCING

THE FINANCING GAP

SOURCES OF EQUITY AND DEBT FINANCE

ADVANTAGES AND DISADVANTAGES OFEQUITY AND DEBT FINANCE

BUYING EXISTING BUSINESS

REASONS FOR BUYING AN EXISTING BUSINESS

EXAMINING FINANCIAL DATA

VALUING THE BUSINESS

CLOSING THE DEAL

FINANCIAL PLANNING

THE IMPORTANCE OF FIANCIAL INFORMATION FOR ENTREPRENEURS

PREPARING FINANCIAL STATEMENT

OPERATING BUDGET

CASH BUDGET

CAPITAL BUDGET

NETWORKING AND NEGOTIATION IN ENTREPRENEURSHIP