• Finance refers to sources of money for a business.

• Finance is life blood of business;

• It is a pre requisite to mobilize resources for organizing industrial production.
• It is also vital for trade: retail, wholesale, export, import;

• Firms need finance to:

Start up a business, eg pay for premises, new equipment and advertising.

Run the business, eg having enough cash to pay staff wages and suppliers on time.
Expand the business, eg having funds to pay for a new branch in a different city or country.

• New businesses find it difficult to raise finance because they usually have just a few customers
and many competitors. Lenders are put off by the risk that the start-up may fail. If that happens,
the owners may be unable to repay borrowed money.

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 • Lack of history upon which to assess risk
• What s the β?
• Without it, what should the market risk premium be? . . . Criteria to identify if
big inner potential e ists

• Lack of ability to compare against other firms when industry is new

• Lack of short term profit potential in the immediate future
• Lack of liquidity . . . CASH IS KING!!!

Horse race between capital, greed and opportunity

Investing in new ventures is cycle process . . . involves both positive ebbs and
flows
People matter . . . Perceptions, judgments, and actions.

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 Entrepreneurial finance involves useful ways of thinking about cash, risk, and value
Teaches skepticism (there are fe er tr e opport nities from a financial
perspective than we often think!)

Helps s identif the right q estions to ask and narro do n the potential
options, which in turn enable us to make better decisions
E : Is Fit an Opport nit ?
Discovery Driven Planning (Market, Margin, Me)
New Venture Strategy
Ex: If I use X financing now and Y financing later, have I created incentives for
all stakeholders to work together?

• Three core principles of entrepreneurial finance

• More cash is preferred to less cash
• Cash sooner is preferred to cash later
• Less risky cash is preferred to more risky cash

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 Opportunity

Financial Sources and

Sources and Business
Business
Strategy Deal Structure
Deal Structure Strategy
Strategy
Degrees of Debt Marketing
Debt Marketing
strategic freedom: Equity Operations
Equity Operations
Other Finance
Time to OOC Other Finance
Time to close Value
Valuecreation
creation
Future alternatives
Risk/reward Financial
Financial
Personal concerns Requirements
Requirements
Driven by:
Driven by:
Burn rate
Burn rate
Operating needs
Operating needs
Working capital
Working capital
Asset requirements and sales
Asset requirements and sales

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 • friends
• family
• other resources, such as savings, credit cards, loans, and investments
• Other sources includes
• banks
• finance companies
• investment companies
• government grants

Debt Financing
Secured financing of a new venture that involves a payback of the funds plus
a fee (interest for the use of the money).
Equity Financing
Involves the sale (exchange) of some of the ownership interest in the venture
in return for an unsecured investment in the firm.

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 Advantages Disadvantages
• No relinquishment of ownership is • Regular (monthly) interest payments
required. are required.
• More borrowing allows for potentially • Continual cash-flow problems can be
greater return on equity. intensified because of payback
• During periods of low interest rates, the responsibility.
opportunity cost is justified since the • Heavy use of debt can inhibit growth
cost of borrowing is low. and development.

An established business can usually get a line of credit from a bank, which it can borrow
against.

line of credit an arrangement whereby a lender agrees to lend up to a specific amount

of money at a certain interest rate for a specific period of time

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 Business Type Financed Financing Term
Debt Start-Up Existing Short Intermediate Long
Source Firm Firm Term Term Term

Trade credit Yes Yes Yes No No

Commercial Sometimes, but Yes Frequently Sometimes Seldom
banks only if strong
capital or
collateral exists
Finance Seldom Yes Most frequent Yes Seldom
companies
Factors Seldom Yes Most frequent Seldom No
Leasing Seldom Yes No Most frequent Occasionally
companies
Mutual savings Seldom Real estate No No Real estate
banks and ventures only ventures only
savings-and-loan
associations
Insurance Rarely Yes No No Yes
companies

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 • Trade Credit
• Credit given by suppliers who sell goods on account.
• Accounts Receivable Financing
• Short-term financing that involves either the pledge of receivables as collateral for a loan
or the sale of receivables at a discounted value (factoring).
• Finance Companies
• Asset-based lenders that lend money against assets such as receivables, inventory, and
equipment.
• Equity Instruments
• Give investors a share of the ownership.
• Loan with warrants provide the investor with the right to buy stock at a fixed price at
some future date.
• Convertible debentures are unsecured loans that can be converted into stock.
• Preferred stock is equity that gives investors a preferred place among the creditors in
the event the venture is dissolved.
• Common stock is the most basic form of ownership and is often are sold through
public or private offerings.

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 • Trade Credit
• Credit given by suppliers who sell goods on account.
• Accounts Receivable Financing
• Short-term financing that involves either the pledge of receivables as collateral for a loan
or the sale of receivables at a discounted value (factoring).
• Finance Companies
• Asset-based lenders that lend money against assets such as receivables, inventory, and
equipment.
• Equity Instruments
• Give investors a share of the ownership.
• Loan with warrants provide the investor with the right to buy stock at a fixed price at
some future date.
• Convertible debentures are unsecured loans that can be converted into stock.
• Preferred stock is equity that gives investors a preferred place among the creditors in
the event the venture is dissolved.
• Common stock is the most basic form of ownership and is often are sold through
public or private offerings.

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 • Equity Financing
• Money invested in the venture with no legal obligation for entrepreneurs to repay the
principal amount or pay interest on it.
• Funding sources: public offering and private placement
• Public Offering
• Going p blic refers to a corporation s raising capital thro gh the sale of sec rities on the
stock markets.
• Initial Public Offerings (IPOs): new issues of common stock

Advantages Disadvantages
• Size of capital amount • Costs
• Liquidity • Disclosure
• Value • Requirements
• Image • Shareholder pressure

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 • Funding from the entrepreneur
• Famil and friends (and fools !)
• Strategic partners
• Angel investors
• Private placement
• SBICs
• Venture Capitalists

• Dilution of ownership
• The risk of sharks
• Dynamics of adding on new partners

Equity funding is sometimes called Risk Capital.

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 Profits

Cash flow

Start-up to Early Stage Growth Stage Maturity

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 State-
sponsored Personal
venture savings Banks Trade credit
capital funds

Small Minority
Venture Friends and business enterprise
capitalists family investment development
companies programs

Private Commercial
Partners SBA loans finance
investors
companies

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 Step 1: Startup Expenses
Startup expenses are one-time expenses that occur before you open your doors for business and start selling
your product or service. Expenses are money you pay for services, like legal expenses, or design services, or rent
— intangible things that you don't get to keep. Expenses reduce your taxable income, but cannot be
depreciated over time. After startup, expenses are accounted for in your profit-and-loss table.

• Legal: Money you spent on legal fees for establishing the business's legal structure, as well as fees for registrations, local licenses, trademark research, etc., belong in
your startup expenses.
• Logo design: While paying for a logo is not essential, a lot of startups want to establish a professional-looking logo before they start. If you paid a professional for this
design work, enter those costs here.
• Initial website design: You're probably going to continue to revise and review the design of your website as the business grows, but that would be an ongoing expense.
What you spend before startup belongs here.
• Insurance: Include any insurance costs you incur before the launch date of your business. This includes insurance on your store/office itself, as well as inventory,
vehicles, etc.
• Payroll: If you have employees on the clock before you open your doors, their pay belongs in your startup expenses. Payroll becomes an item in your profit-and-loss
table later, but pre-startup, it's a startup expense.
• Rent/Security deposit: Most businesses secure a location and have to start paying for it before their startup date. If you put down a security deposit and paid rent prior
to day one of your business, that is considered a startup expense.
• Computer and office equipment: You might think that these should be considered assets, but the IRS allows startups to designate a limited amount of office equipment
as expenses. Currently, you can deduct around $100k in this category.
• Training: If you took courses or attended workshops to get prepared for startup, (or you sent employees for training) the costs for that training should be listed in your
expenses.
• Pre-opening marketing: You want people to know that you're about to launch your business. Any advertising and marketing expenses should be included here things
like radio or print ads, brochures, or "Grand Opening" signs and announcements.
• Office supplies: Chances are you needed to stock up on items you'll need to support your office. Your paper, pens, personalized stationary, even your paper clips should
be listed as startup expenses.
• Consultants: Many businesses hire consultants to assist when starting a business. Whether they consulted on site location, helped you learn more about your
competition, or advised you on your IT needs, the costs associated with their services are startup expenses.
• Misc and other: There most likely were other expenses associated with your startup that you should make sure to include. Did you pay for electricity to your storefront
or office, or for phone service before you launched? Maybe you had software developed or had other unique needs.

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 Step 2: Startup Asset
Assets are tangible things like tables and chairs, land, and equipment, and even sometimes intangible things like
intellectual property, that you own. Unlike expenses, assets are not deductible against income. But assets whose
value declines over time can be depreciated. After startup, you will list your assets on your balance sheet.
Cash in the bank: In addition to cash that you will use to cover your ongoing monthly expenses (which we will calculate in the next step), you might want some additional cash
in your bank account when you open your doors for business. This money could be used simply as a safety net or to cover any unforeseen expenses during the first few months
of business.

Starting inventory: If you sell products, you should include the money spent on the inventory you have at the start of business. If you are starting a service-based business with
no inventory, feel free to leave a zero in this field.

Other current assets: These are normally things like supplies, napkins, and other small items that last less than a year but are still considered assets. You might make a list
elsewhere and put the total here. The standard is different for every business.

Office furniture: Chairs, tables, shelves, small appliances all fall into this category. If you purchased the furniture prior to start up, it should be included here.

Signage:This includes the sign outside in the parking lot, for instance, as well as in-store signs that you'll use to announce sale items or to categorize your inventory.

Leasehold improvements: Here's where you'll account for money spent on fixing up the place after you find it and rent it but before your starting date. Remember to include
things like new lighting, paint, repaving the parking lot, etc.

Plant and equipment: The costs here will vary greatly depending on the type of business you are starting. Generally considered long-term or fixed assets, these are items that
depreciate over more than five years and are likely to last at least that long.

Land:The land your company owns is also considered a long-term asset. You want to list the purchase price, not the current value, because you're reflecting the money you've
actually put into this particular asset.

Other assets:The list of what could be considered "other assets" is long. Intellectual property, which might be hard to quantify, fixtures for you store or office, or equipment that
went beyond what the IRS allowed you to consider expenses can be entered here.

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 Step 3: Recurring Costs
• One of the hardest estimates is the cash you'll need to have in the bank as a war chest, or cash reserve, to keep the business
afloat during the normal lean months, just after the start, before sales grow enough to support the normal cash outlays.
• There's no magic formula. You may have heard some time-worn guidelines, like the one that says you should have six months'
worth of expenses stored up before you start. This isn't a bad idea, but realistically, can you afford it? Can you raise the money?
Are you able to get some early sales, to offset expenses? Can you get to a monthly break-even point sooner, or will it take you
longer? In the end, what you need is a reasonable estimated guess.

• Monthly Expenses: Running monthly expenses, often called the burn rate. This is at best an estimated guess.
• Rent:
• Utilities:
• Payroll:
• Inventory:
• Marketing:
• All other:
• How many months?
• Number of months:
• How many months of expenses do you think you'll need? (Set an estimate here; be conservative, and remember, there is no
absolute right or wrong answer)

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 Your startup costs are the sum of what you will spend as startup expenses,
plus what you need to spend to buy startup assets, plus the cash you need
to have in the bank the day you open your business.
Startup Expenses: Rs 0.00
Startup Assets: Rs. 0.00
Cash for Recurring Costs: Rs. 0.00

Total Startup Costs: Rs. 0.00

Your Estimate: Rs 0.00

What's next?

The next step in starting your business, once you have figured out how much it will
cost, is to figure out where the money will come from.

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 • Bootstrapping Figure 2-2

• Seed Financing Sources of New Venture Financing

• R&D Financing Development Start-up Early Rapid Exit

Growth Growth
• Start-up Financing Entrepreneur
Friends and Family
• First-stage Financing Angel Investors
• Second-stage Financing Strategic Partner
Venture Capital
• Third-stage Financing Asset-based Lender
Equipment Lessor
• Mezzanine Financing SBIC
Trade Credit
• Bridge Financing Factor
Mezzanine Lender
• LBO, MBO, IPO Public Debt
IPO
Acquisition, LBO, MBO

Black shading indicates primary focus of investor type.

Gray shading indicates secondary focus, or focus of a subset of investors.

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 Bootstrapping, operating a business as frugally as possible and cutting all unnecessary expenses,
such as borrowing, leasing, and partnering to acquire resources.
Bootstrapping involves:
hiring as few employees as possible
leasing anything you can
being creative
Bootstrapping entrepreneurs can also ask suppliers to allow for longer payments terms, ask
customers to pay in advance, or sell their accounts receivable to a factor.
Factor an agent ho handles an entreprene r s acco nts recei able for a fee

Advantages
• No time waste in hunting investment
• Full control on the company
• not answerable to investors
• Quick management of money
• Creative problem solving
• More focus on customers not investors
• Efficient Product development and marketing
Disadvantages
• Not always practical in case of manufacturing
& importing
• It can take much longer to grow a company
without investment
• You will likely not be earning any money for
quite a while
• You can easily end up in a lot of debt

If you survive bootstrapping you will have a strong, lean, efficient, customer focused company

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 • An angel often invests because of his or her belief in a business concept and the founding
team.
• angel a private, nonprofessional investor, such as a friend, a relative, or a business associate,
who funds start-up companies
• An existing business can use venture capital financing to raise large amounts of money to
achieve its goals.
• venture capital a source of equity financing for small businesses with exceptional growth
potential and experienced senior management
• Venture capitalists often provide managerial and technical expertise to small businesses.
• venture capitalists individual investors or investment firms that invest venture capital
professionally

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Beware of Little Expenses,
A small leak
can sink a Great Ship