Unit –IV - Financing and How to Start Business?

Unit IV

Financing and How to Start the Business?

Banking Finance for Business

1) Fixed capital requirements: In order to start business, funds are required to purchase
fixed assets like land and building, plant and machinery, and furniture and fixtures. This
is known as fixed capital requirements of the enterprise. The funds required in fixed
assets remain invested in the business for a long period of time. Different business units
need varying amount of fixed capital depending on various factors such as the nature of
business, etc. A trading concern for example, may require small amount of fixed capital
as compared to a manufacturing concern. Likewise, the need for fixed capital investment
would be greater for a large enterprise, as compared to that of a small enterprise.
2) Working capital requirements: The financial requirements of an enterprise do not end
with the procurement of fixed assets. No matter how small or large a business is, it needs
funds for its day-to-day operations. This is known as working capital of an enterprise,
which is used for holding current assets such as stock of material, bills receivables and
for meeting current expenses like salaries, wages, taxes, and rent. The amount of working
capital required varies from one business concern to another depending on various
factors. A business unit selling goods on credit, or having a slow sales turnover, for
example, would require more working capital as compared to a concern selling its goods
and services on cash basis or having a speedier turnover
3) Factoring: Factoring is a financial service under which the ‘factor’ renders various
services which includes: (a) Discounting of bills (with or without recourse) and collection
of the client’s debts. Under this, the receivables on account of sale of goods or services
are sold to the factor at a certain discount. The factor becomes responsible for all credit
control and debt collection from the buyer and provides protection against any bad debt
losses to the firm. There are two methods of factoring — recourse and non-recourse.
Under recourse factoring, the client is not protected against the risk of bad debts. On the

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other hand, the factor assumes the entire credit risk under nonrecourse factoring i.e., full
amount of invoice is paid to the client in the event of the debt becoming bad. (b)
Providing information about credit worthiness of prospective client’s etc., Factors hold
large amounts of information about the trading histories of the firms. This can be
valuable to those who are using factoring services and can thereby avoid doing business
with customers having poor payment record. Factors may also offer relevant consultancy
services in the areas of finance, marketing, etc. The factor charges fees for the services
rendered. Factoring appeared on the Indian financial scene only in the early nineties as a
result of RBI initiatives. The organisations that provides such services include SBI
Factors and Commercial Services Ltd., Canbank Factors Ltd., Foremost Factors Ltd.,
State Bank of India, Canara Bank, Punjab National Bank, Allahabad Bank. In addition,
many nonbanking finance companies and other agencies provide factoring service.
4) Lease Financing: A lease is a contractual agreement whereby one party i.e., the owner
of an asset grants the other party the right to use the asset in return for a periodic
payment. In other words it is a renting of an asset for some specified period. The owner
of the assets is called the ‘lessor’ while the party that uses the assets is known as the
‘lessee’ (see Box A). The lessee pays a fixed periodic amount called lease rental to the
lessor for the use of the asset. The terms and conditions regulating the lease arrangements
are given in the lease contract. At the end of the lease period, the asset goes back to the
lessor. Lease finance provides an important means of modernisation and diversification to
the firm. Such type of financing is more prevalent in the acquisition of such assets as
computers and electronic equipment which become obsolete quicker because of the fast
changing technological developments. While making the leasing decision, the cost of
leasing an asset must be compared with the cost of owning the same.
5) Commercial Paper: Commercial Paper (CP) is an unsecured money market instrument
issued in the form of a promissory note. It was introduced in India in 1990 for enabling
highly rated corporate borrowers to diversify their sources of short-term borrowings and
to provide an additional instrument to investors. Subsequently, primary dealers and all-
India financial institutions were also permitted to issue CP to enable them to meet their
short-term funding requirements for their operations. Individuals, banking companies,
other corporate bodies (registered or incorporated in India) and unincorporated bodies,

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NonResident Indians (NRIs) and Foreign Institutional Investors (FIIs) etc. can invest in
CPs. CP can be issued for maturities between a minimum of 7 days and a maximum of up
to one year from the date of issue in denominations of Rs.5 lakh or multiples thereof.
However, the maturity date of the CP should not go beyond the date up to which the
credit rating of the issuer is valid.

Non banking Institutions and Agencies

1. Asset Finance Company (AFC) : An AFC is a company which is a financial institution

carrying on as its principal business the financing of physical assets supporting
productive/economic activity, such as automobiles, tractors, lathe machines, generator
sets, earth moving and material handling equipments, moving on own power and general
purpose industrial machines. Principal business for this purpose is defined as aggregate of
financing real/physical assets supporting economic activity and income arising therefrom
is not less than 60% of its total assets and total income respectively.
2. Investment Company (IC) : IC means any company which is a financial institution
carrying on as its principal business the acquisition of securities,
3. Loan Company (LC): LC means any company which is a financial institution carrying on
as its principal business the providing of finance whether by making loans or advances or
otherwise for any activity other than its own but does not include an Asset Finance
Company.
4. Infrastructure Finance Company (IFC): IFC is a non-banking finance company a) which
deploys at least 75 per cent of its total assets in infrastructure loans, b) has a minimum
Net Owned Funds of Rs 300 crore, c) has a minimum credit rating of ‘A ‘or equivalent d)
and a CRAR of 15%.
5. Systemically Important Core Investment Company (CIC-ND-SI): CIC-ND-SI is an
NBFC carrying on the business of acquisition of shares and securities.
6. Infrastructure Debt Fund: Non- Banking Financial Company (IDF-NBFC) : IDF-NBFC is
a company registered as NBFC to facilitate the flow of long term debt into infrastructure
projects. IDF-NBFC raise resources through issue of Rupee or Dollar denominated bonds

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of minimum 5 year maturity. Only Infrastructure Finance Companies (IFC) can sponsor
IDF-NBFCs.
7. Non-Banking Financial Company - Micro Finance Institution (NBFC-MFI): NBFC-MFI
is a non-deposit taking NBFC having not less than 85% of its assets in the nature of
qualifying assets which satisfy the following criteria:
o a. loan disbursed by an NBFC-MFI to a borrower with a rural household annual
income not exceeding Rs 1,00,000 or urban and semi-urban household income
not exceeding Rs 1,60,000;
o loan amount does not exceed Rs 50,000 in the first cycle and Rs 1,00,000 in
subsequent cycles;
o total indebtedness of the borrower does not exceed Rs 1,00,000;
o tenure of the loan not to be less than 24 months for loan amount in excess of Rs
15,000 with prepayment without penalty;
o loan to be extended without collateral;
o aggregate amount of loans, given for income generation, is not less than 50 per
cent of the total loans given by the MFIs;
o loan is repayable on weekly, fortnightly or monthly instalments at the choice of
the borrower
8. Non-Banking Financial Company – Factors (NBFC-Factors): NBFC-Factor is a non-
deposit taking NBFC engaged in the principal business of factoring. The financial assets
in the factoring business should constitute at least 50 percent of its total assets and its
income derived from factoring business should not be less than 50 percent of its gross
income.
9. Mortgage Guarantee Companies (MGC) - MGC are financial institutions for which at
least 90% of the business turnover is mortgage guarantee business or at least 90% of the
gross income is from mortgage guarantee business and net owned fund is Rs 100 crore.
10. NBFC- Non-Operative Financial Holding Company (NOFHC) is financial institution
through which promoter / promoter groups will be permitted to set up a new bank .It’s a
wholly-owned Non-Operative Financial Holding Company (NOFHC) which will hold the
bank as well as all other financial services companies regulated by RBI or other financial
sector regulators, to the extent permissible under the applicable regulatory prescriptions.

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Venture Capital
Meaning and Definition

‘Venture Capital’ is an important source of finance for those small and medium- sized firms,
which have very few avenues for raising funds. Although such a business firm may possess a
huge potential for earning large profits in the future and establish itself into a larger enterprise.
But the common investors are generally unwilling to invest their funds in them due to risk
involved in these types of investments. In order to provide financial support to such
entrepreneurial talent and business skills, the concept of venture capital emerged. In a way,
venture capital is a commitment of capital, or shareholdings, for the formation and setting-up of
small scale enterprises at the early stages of their lifecycle.

The term venture capital comprises of two words, namely, ‘venture’ and ‘capital’. The term
venture literally means a course or proceeding, the outcome of which is uncertain but which is
uncertain but which is attended by the risk of danger of ‘loss’. On the other hand, the term capital
refers to the resources to start the enterprise. However, the term venture capital can be
understood in two ways.

According to narrow sense, the capital which is available for financing the new business ventures
is called venture capital. Generally, it involves lending finance to the growing companies.

In the broad sense, venture capital is the investment of long-term equity finance where the
venture capitalist earns his returns primarily in the form of capital gain. It is under the
assumption that the entrepreneur and thee venture capital would act as partners. It is a
commitment of capital for the formation and setting up of small scale enterprises specializing in
new ideas or new technologies. Venture capital does not deal in financing the enterprise which is
engaged intrading, broking, investment or financial services and agency or liaison work. It is
generally considered as a high risk capital. Venture capital is not an injection of funds into new
firm but also an input of the skills need to set up thee firm, design its marketing strategy,
organize and then manage it.

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A venture capitalist (also known as a VC) is a person or investment firm that makes venture
investments, and these venture capitalists are expected to bring managerial and technical
expertise as well as capital to their investments. A venture capital fund refers to a pooled
investment vehicle (often an LP or LLC) that primarily invests the financial capital of third-
party investors in enterprises that are too risky for the standard capital markets or bank loans.

Venture capital is also associated with job creation, the knowledge economy and used as a proxy
measure of innovation within an economic sector or geography. The term Venture Capital fund
is usually used to denote Mutual funds or Institutional investors. They provide equity finance or
risk capital to little known, unregistered, highly risky, young and small private business,
specially in technology oriented and knowledge intensive business.

Venture Capital termed as long-term funds in equity or semi- equity from to finance hi-tech
investment in novel technology based projects with display potential for significant growth and
financial return.”

According to Jame Koloski Morries, “ Venture capital is defined as providing seed, startup, and
first stage financing and also funding expansion of companies that have already demonstrated
their business potential but do not yet have access to the public securities market or to credit-
oriented institutional funding sources, Venture Capital also provides management in leveraged
buy out financing”.

1. Large Amounts of Capital Can Be Raised

Many startups seeking small business loans may only qualify for $5 million or less in financing
and qualifying can be difficult. However, venture capital is available in amounts as small as
$100,000 for the seed stage and more than $25 million for more mature startups. There’s also a
tendency for startups to raise venture capital several times, allowing companies to access large
amounts of capital that would otherwise be impossible to obtain.

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2. Can Provide Risk Management Support

Obtaining venture capital can help startup founders manage the risk inherent in most startups. By
having an experienced team oversee growth and operations, startups are more likely to avoid
major issues. The rate of failure for startups is still 20% in the first year, but when a complex
situation arises, having a partner or investor with experience in helping startups succeed can
improve the odds of making a good decision.

3. No Monthly Payments

When a venture capital firm invests in your business, it’ll do so for equity in the company. This
means that, unlike small business and personal loans, there are no regular payments for your
business to make. This frees up working capital for your business, allowing you to reinvest by
improving products, hiring a larger team, or further expanding operations.

4. Personal Assets Don’t Need To Be Pledged

In most cases, you won’t have to contribute additional personal assets to the growth of your
business. While many startup funding options will require founders to pledge some form of
personal assets as collateral, most venture capital agreements won’t require a pledge of personal
assets when the agreement is drafted.

5. Experienced Leadership and Advice Is Available

Many successful startup founders become partners at venture capital firms after they exit their
businesses. These individuals often have experience scaling a company, solving day-to-day and
longer-term problems, and monitoring financial performance. Even if they don’t have a startup
background, they often have experience with assisting startups and sit on the boards of as many
as 10 at a time. This can make them valuable leadership resources for the companies in which
they’re invested.

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6. Networking Opportunities Are Provided

When you’re focused on your business, there isn’t much time to network with people that can
help your business grow. Partners at a venture capital firm may spend up to 50% of their time
building their network to assist the companies they invest in. Having access to this network can
help you forge new partnerships, build out your clients, hire key employees, and raise future
rounds of funding.

7. Collaboration Opportunities with Industry Experts and Other Startups Are Available

When you receive venture capital funding, you’re getting what’s often referred to as “smart
money.” This means the money you get comes with the added benefit of the expertise of the
venture capital firm. Often, you’ll work with partners from the firm, other startup founders who
have received funding, and experts from both of their networks to get your company on the right
path to growth and success.

8. Assistance with Hiring and Building a Team

The team you need to start a company and the team you need to scale are often not the same, and
venture capital firms can help get key people in place at the company to help you grow. Also,
many potential employees may consider a venture-backed startup less risky than a traditional
startup with no funding, making it easier to recruit a talented and well-rounded team.

9. Increased Publicity and Exposure Is Likely

Most venture capital firms have a public relations team and media contacts, and it’s in their best
interest to get exposure for your startup. Working with a venture capital firm can add credibility
to a startup, especially for founders that haven’t built other successful companies. The increased
publicity can lead to getting noticed by potential employees, customers, partners, and other
venture capital firms interested in raising funding.

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10. Help Raising Future Rounds of Funding Is Available

Venture capital firms are interested in seeing your company raise additional funding at a higher
valuation as it increases the return on their investment. They can introduce you to additional
firms that can better assist you at later stages and provide additional funding. Venture capital
firms often reserve the right to invest in future rounds of funding and often contribute additional
capital as your business grows.

Government funding pre launching schemes

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6. Start-up India
Launched by Prime Minister Narendra Modi in 2016, the scheme falls under the purview of the
Department of Industrial Policy and Promotion. Aims to support Indian entrepreneurs in creating
10 lakh mobile app startups.
7. ATAL Innovation Mission
The government scheme, set up by Niti Aayog, was created to promote an innovative culture and
the development of the spirit of entrepreneurship across India. The scheme aims to create
cooperation between state, central, and local innovation schemes and implement
entrepreneurship spirit from schools to corporates by developing world-class Atal Incubators
(AICs). This would help to address commercial and social entrepreneurship ventures in India.
8. e-Biz Portal
Founded in 2013, this is the first online platform that allows government-to-business (G2B)
communication. e-Biz’s portal primary purpose was to create an entrepreneurship friendly
atmosphere in the country. The platform has been developed by Infosys and has launched 29
services across 5 states in India. It is a single communication online forum for Indian
businesspeople and investors for conducting transactions, clearances, and activities related to
both of them.
9. Support for International Patent Protection in Electronics & Information
Technology (SIP-EIT)
The SIP-EIT scheme was launched by the Ministry of Electronics and Information Technology
to provide financial funding for MSMEs and Technology Startups to encourage innovation,
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acknowledge international patent rights and optimise the growth of the sector in the
county. Businesses that want to go global need to apply for intellectual property rights as
innovations are at risk of being stolen or misappropriated. Hence, the government has executed
various protection measures through the SIP-EIT scheme.
10.Multiplier Grants Scheme (MGS)
MGS was launched under the Department of Electronics and Information Technology (DeitY)
for promoting integrated research and development (R&D) between industry and educational
institutions for developing products and packages. Under this scheme, the government provides
financial assistance at 2x times the amount contributed by the industry, provided the industry
supports R&D of products that get marketed at the institutional level.
MGS encourages and hastens the development of indigenous products/services. Government
grants are available up to Rs. 2 crores per project with project tenure limited to around 2 years.
For industrial collaborations, the cost is limited to Rs. 4 crores with a maximum tenure of 3
years.
11.Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE)
The government established CGTMSE for providing collateral-free business loans to MSME and
startups. The scheme allows business units to get collateral-free loans at a low rate of interest up
to a maximum of Rs. 100 lakhs under a tie-up with SIDBI (Small Industries Development Bank
of India) for promoting new businesses and relaunching existing ones. The loan is provided
mainly for manufacturing companies, either as working capital or term loan.
12.Software Technology Park (STP)
STP scheme has been established as a 100% export-oriented programme for promoting and
exporting computer software and professional services through communication networks or
physical media. The scheme focuses solely on computer software. 100% Export Oriented Units
(EOU) and Export Processing Zones (EPZ) concepts for forming Science Parks/Technology
Parks are covered under this scheme.
13. Loan For Rooftop Solar Pv Power Projects
The scheme is committed to the development of 40,000 MWp of Grid-Interactive Rooftop Solar
PV Plants over the next five years for increasing reliance on non-conventional energy sources.
Such rooftop solar PV plants, with capacities between 1 kW - 500 kW are expected to be

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installed in various sectors like residential, commercial, and the like across India. Under the
scheme, a subsidy of 15% is provided to organisations or individual enterprises for such plants.
14.NewGen Innovation and Entrepreneurship Development Centre (NewGen IEDC)
The NewGen IEDC scheme has been launched by the National Science and Technology
Entrepreneurship Development Board. The scheme aims to instil a spirit of creativity and
entrepreneurship among the youth in India through various methods like counselling, coaching,
and assistance. There is also provision for supporting and encouraging entrepreneurship.
15.Dairy Processing and Infrastructure Development Fund (DIDF)
DIDF is a fund constituted under NABARD in 2017, wherein milk unions, multi-state milk
cooperatives, state dairy federations, milk-producing enterprises, and NDDB subsidiaries
project's eligibility criteria can avail a loan. The loan component consists of 80% with the
borrower to pay the remaining 20% payment. Interest is charged at 6.5 % p.a. and loan tenure is
decided based on the amount of money borrowed. The loan repayment is guaranteed by the
respective state government, and in case of borrower default, the state government steps in to
contribute the defaulted portion.

Government funding Post- launching schemes

Procedures of Registering a Business Enterprise

One of the primary aspects of starting a business enterprise is registering the business. Primarily,
the registration of business is filed with the state in which the business operates. Some types of
businesses have to register with the federal government, but only if you operate businesses such
as those pertaining to firearms, tobacco and alcohol. Registering your business with state entities
helps you to start and run your business legally. The Small Business Administration (SBA) is a
great resource that provides many tools to help with registering your business.

Choose a Business Structure

Before you can set out to register your business at any level (county, state or federal), you first
have to decide which business structure you want to register. Your choices are sole

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proprietorship, corporation, partnership or limited liability company (LLC). The business

structure you choose correlates with the type of documentation you have to file with the state
secretary’s office where the business operates in order to register the business. The SBA has a
useful guide for selecting the right business structure for your needs.

Pick a Business Name

In order to register any type of business, you also have to choose a business name. Most states,
Texas included, do not allow two businesses to operate in the state with the same name. Because
of this, it is wise to choose a couple of backup names in case your first choice is already in use.

If you are registering a corporation, it is a requirement for the business name to carry one of the
following designations: Incorporated, Corporation, Company, Inc., Corp. or Co.

Register with the State

You can obtain the application that pertains to your business structure from the office of the
Secretary of the State for the state where you are registering your business. Depending on the
business structure, you may have to supply supplemental documentation with the application.
For example, a corporation requires the Articles of Incorporation and a partnership requires a
Partnership Agreement.

Step 1: Incorporate your Business

You must first incorporate your business as a Private Limited Company or a Partnership firm or
a Limited Liability Partnership. You have to follow all the normal procedures for registration of
any business like obtaining the Certificate of Incorporation/Partnership registration, PAN, and
other required compliances.

Step 2: Register with Startup India

Then the business must be registered as a startup. The entire process is simple and online. All
you need to do is log on to the Startup India website and fill-up the form with details of your
business. Next, enter the OTP which is sent to your e-mail and other details like, startup as the
type of user, name and stage of the startup, etc. After entering these details, the Startup India
profile is created.

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Once, your profile is created on the website, startups can apply for various acceleration,
incubator/mentorship programmes and other challenges on the website along with getting access
to resources like Learning and Development Program, Government Schemes, State Polices for
Startups and pro-bono services.

Step 3: Get DPIIT Recognition

The next step after creating the profile on the Startup India Website is to avail Department for
Promotion of Industry and Internal Trade (DPIIT) Recognition. This recognition helps the
startups to avail benefits like access to high-quality intellectual property services and resources,
relaxation in public procurement norms, self-certification under labour and environment laws,
easy winding of company, access to Fund of Funds, tax exemption for 3 consecutive years and
tax exemption on investment above fair market value.

Step 4: Recognition Application

The ‘Recognition Application Detail’ page opens. On this page click on ‘View Details’ under the
Registration Details section. Fill up the ‘Startup Recognition Form’ and click on ‘Submit’.

Step 5: Documents for Registration

• Incorporation/Registration Certificate of your startup

• Details of the Directors
• Proof of concept like pitch deck/website link/video (in case of a validation/ early
traction/scaling stage startup)
• Patent and trademark details (Optional)
• PAN Number

Step 6: Recognition Number

That’s it! On applying you will immediately get a recognition number for your startup. The
certificate of recognition will be issued after the examination of all your documents which is
usually done in 2 days after submitting the details online.

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However, be careful while uploading the documents. If on subsequent verification, it is found to

be obtained that the required document is not uploaded/wrong document uploaded or a forged
document has been uploaded then you shall be liable to a fine of 50% of your paid-up capital of
the startup with a minimum fine of Rs. 25,000.

Step 7: Other Areas

Patents, trademarks and/or design registration: If you need a patent for your innovation or a
trademark for your business, you can easily approach any from the list of facilitators issued by
the government. You will need to bear only the statutory fees thus getting an 80% reduction in
fees.

Register with the IRS

The Internal Revenue Service (IRS) requires business enterprises to obtain an employer
identification number, which is the business equivalent of a Social Security number. This is the
number you use to file all of your business tax return forms, and can obtained by completing the
IRS Form SS-4. If you elect to register your business as an S corporation, this is an election you
make with the IRS by filing IRS Form 2553.

Obtain Business Licenses

Some businesses need one or more licenses to operate. The types of business licenses you need
depend on the type of business you’re opening and the city, county and state. While some states
do require you to obtain a business license, other states, such as Texas, do not require a business
to obtain a state license. You do need a city or county license to operate a business, so contact
the county clerk’s office where you’re opening the business to obtain this license.

Maintain a Business License

After registering your business, it is important to stay in compliance with all filing requirements
according to BizFilings. Even if you plan to close your business, there are often necessary forms

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to be filed to avoid penalties. If you decide to grow your business and expand into offering new
products or services, that can require new licenses as well. Each state or local authority has
different requirements. It is important to know how often and how to file so you can maintain
your licensing in good standing.

Challenges and Difficulties in starting Enterprise

(i) Developing the Vision and Business Idea: Developing a business idea is usually the
first challenge faced by every entrepreneur when starting a business from scratch.
Finding the right business opportunity or creatively developing an idea is certainly
not an easy task. “Envisioning the idea” is the first true task of an entrepreneur. As an
entrepreneur, you must possess the ability to see what others cannot see. While others
see problems, you must see opportunities.
(ii) Raising Capital for your Startup: After developing your idea, the next challenge
you are going to face when starting a business from scratch is that of raising capital.
As an entrepreneur, you are the only one that knows business your idea to the core.
You are the only one that knows the story of your future. Trying to convince investors
about something that does not exist is definitely a challenge. Trying to make them
understand that you are trustworthy and equal to the task is not child’s play especially
when you are building your first business.
(iii) Business Model Failure: One of the most common causes of failure in the startup
world is that entrepreneurs are too optimistic about how easy it will be to acquire
customers. They assume that because they will build an interesting web site, product,
or service, that customers will beat a path to their door. That may happen with the
first few customers, but after that, it rapidly becomes an expensive task to attract and
win customers, and in many cases the cost of acquiring the customer is actually
higher than the lifetime value of that customer.
(iv) Poor Management Team: An incredibly common problem that causes startups to
fail is a weak management team. Weak management teams make mistakes in multiple
areas such as strategy; building a product that no-one wants to buy bad marketing
strategies etc. They are also usually poor at execution, which leads to issues with the
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product not getting built correctly or on time, and the go-to market execution will be
poorly implemented.
(v) Liquidity or Cash Crunch: A fourth major reason that startups fail is because they
ran out of cash. A key job of the CEO is to understand how much cash is left and
whether that will carry the company to a milestone that can lead to a successful
financing, or to cash flow positive.
(vi) Product Problems: Another reason that companies fail is, because they fail to
develop a product that meets the market need. This can either be due to simple
execution. Or it can be a far more strategic problem, which is a failure to achieve
Product/Market fit. Most of the time the first product that a startup brings to market
does not meet the market need.
(vii) Finding Good Employees: Business owners know how difficult it is to find a
hardworking, trustworthy employee. Most employees want to work less and get paid
more. Finding a good employee who will be passionate about delivering his or her
services is quite difficult. Finding good employees is a minor task compared to the
business challenge of forging your hired employees into a team.
(viii) Finding Good Customers: The next challenge you will face in the process of
starting a small business from scratch is finding good customers. In the process of
building a business, you will come to find out that there are good customers as well as
bad customers. You must be on guard for bad customers. Good customers are really
hard to find. A good customer will be loyal to your company and will be willing to
forgive you if you make a mistake and apologize. A good customer will try to do the
right thing that will benefit both himself and your company mutually. Bad customers
will always look for loopholes in the company’s policy to exploit and make a few
gains. Bad customers will always try to exploit the company’s goodwill and look for
ways to rip off the company. Bad customers are responsible for bad debts. Good
customers build your business and bad customers will always try to liquidate your
business.
(ix) Dealing with Competition: Competition is yet another challenge you will face when
starting a business. Most individuals see competition as a plague but competition is a
good challenge. It is a benchmark for creativity, the main engine that stimulates

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 Unit –IV - Financing and How to Start Business?

innovation and production of quality products at great prices. Without competition,

there will be no innovation and without innovation, the world will be stagnant.
Competition keeps us on our toes and drives us to constantly improve our products
and services. But you must be warned. Competition can make your business lose its
relevance in the eye of your customers so you must always be on guard.
(x) Unforeseen Business Challenges and Expenses: Just as a sailor prepares for
unexpected storm, just as a pilot is always on the watch for unpredictable bad weather
and thunderstorms, so must an entrepreneur prepared for whatever comes.
(xi) Unexpected challenges can come in the form of:
i. Unexpected legal suits
ii. Inconsistent government policy
iii. Unexpected resignation of staff from sensitive office
iv. Bad debts from customers
v. Loss of market share
vi. Dwindling working capital
vii. Inadequate stock or inventory

These business challenges, if not handled properly can ruin your plan to build a
successful business. Another challenge you must expect is an unforeseen increase in
business expenses. If not handled properly, it might result in constant negative cash
flow and eventually; business failure.

(xii) Lack of Research & Development Facility: We all know that it is a time for
innovation and creativity. Any business can fail if there are no efforts being made to
constantly innovate. The start-ups lack the financial viability and face cash crunch
always, therefore, they find it difficult to have a R&D.

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