Financing an

UNIT 7 FINANCING AN ENTERPRISE Enterprise

Objectives
After going through this unit, you should be able to:
• understand the need and various forms of financing the business
• appraise equity and debt financing options
• realize the challenges faced by the enterprise for financing at initial stage
• analyse the current scenario with respect to various sources of financing

Structure
7.1 Introduction
7.2 Sources of Finance
7.3 Stage of Business Development and Source of Funding
7.4 Bootstrapping Techniques
7.5 Angel Investors
7.6 Venture Capital Investors
7.7 Term Loan
7.8 Debentures
7.9 Summary
7.10 Key Words
7.11 Self-Assessment Questions
7.12 References/Further Readings

7.1 INTRODUCTION
Having checked the feasibility of business idea and prepared the project
report, it is the time for an entrepreneur to look for the options for financing
the project.

There are many challenges related to finance, that the entrepreneur has to
face at initial stage of business development.

• In the seed or start up stage, the entrepreneur may not have sufficient
collateral to be offered to the bank for availing the traditional term
finance.
• Moreover, in the initial stage, the funding requirement will be small and
the risk will be high. So, investors may not be interested to invest their
money.
• If the entrepreneur is starting something new for the first time, there will
be no proven commercial success of his or her business idea so it will be
very difficult to attract the external investment and the internal funding
may not be sufficient to execute the business idea.
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Establishing a New • At initial stage, the entrepreneur may not have reputation or credibility in
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the market to attract the external investors.
• Initial Public Offering (IPO) is not viable option for raising the funds at
this stage as the new ventures may not be eligible for IPO as per
Securities and Exchange Board of India (SEBI) guidelines (NSE India,
n.d.).

However, funding ecosystem for entrepreneurship has evolved over a period

of time. Government of India has taken number of initiatives to promote the
start-up culture in the country. By learning this unit, you will be able to
understand various sources of finance and their applicability according to the
stage of business development.

7.2 SOURCES OF FINANCE

In every business, capital can be arranged broadly from two sources. i.e.,
1. Internal Sources
2. External Sources

Internal Sources:
When the entrepreneur manages the funds from within the enterprise, it is
known as using internal sources. This refers to the owner’s own money
known as equity capital. It also includes the deposits and loans given by the
promoters or directors as the case may be. Sometimes, the promoters raise the
personal loan on their investments in life insurance policy, provident funds,
fixed assets or any other form of investments. If the business is already
running, the entrepreneurs retain a part of earnings and plough back in the
business for expansion. These retained earnings may not be very huge
amount for small enterprises, however, it forms a part of internal sources.

External Sources:
External sources include all other sources which are not internal. External
sources of funds may be further divided in to two parts.
1. Debt financing
2. Equity financing

Debt financing includes the borrowings from banks and financial institutions
for meeting the short term (working capital) and long term (Term Loan)
capital requirements. It also includes issue of debentures. While angel
investment, venture capital investment, private placement, private equity;
form the part of equity financing.

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 Financing an
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Figure 7.1 Sources of Finance

Source: Author’s own output

The entrepreneur may face a dilemma here. He or she may be confused

whether to use equity financing or debt financing option. It is essential to
understand at this point of time that neither 100% debt nor 100% equity
financing is desirable. If the entrepreneur funds the entire business with the
use of debt capital, then there is always an obligation to repay the debt along
with the interest. Here, equity financing has an advantage as equity capital is
never repaid. Alternatively, if the entrepreneur funds the entire business with
equity capital, it will result into total dilution of ownership and control.
Further, the shareholders will not get the advantage of trading on equity.
Trading on equity means use of debt products leads to higher earnings per
share for the shareholders of companies (Groww, n.d.).

Hence, a business enterprise needs to maintain a proper balance between the

use of equity and debt in its capital structure. This is known as Optimal
Capital Structure. It has following characteristics:
• Optimal capital structure yields maximum return with minimum cost.
• Such capital structure should be flexible to accommodate the future
requirement of capital for expansion.
• Use of debt should always be within the repaying capacity of the firm.
• The capital structure should ensure proper control to the promoter and
should not result in complete dilution of control.

In fact, following factors should be considered by the entrepreneurs while

deciding the mix of equity and debt financing.

Table 7.1: Factors Determining The Capital Structure

Nature of Business and If the business is operating in a sector where the

Cash flows sales are subject to fluctuations or where the cash
flows are unpredictable, such businesses should
rely less on debt capital. On the other hand, if the
demand for the product is inelastic, cash flows 133
Establishing a New are certain and can be predicted, such businesses
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can apply more of debt and less of equity capital.

Size of Enterprise Investors consider safe to lend to large enterprises

as compared to smaller ones. So, the small
enterprises will have to rely more on owners’
capital (equity) and less on borrowed funds.

Trading on Equity If the rate of return on capital employed is higher

as compared to interest on borrowed capital, the
shareholders get the advantage of trading on
equity. In such situation, there is greater
application of debt capital.

Purpose of Financing For the productive purpose of financing, higher

reliance on debt capital is justified. For example,
if a term loan of 5 years is taken to buy a
machinery with the useful life of 5 years, the
interest on term loan can be paid out of the cash
flows generated with the use of such machinery.
However, if the purpose of financing is not
productive, use of owners’ capital is justified.

Provision for future As business expands its operations, it will need

more funds. Hence, it is advisable to use the best
securities at the last. All the financing options
should not be applied simultaneously so that there
is always a scope of modifying the capital
structure in future.

Source: Author’s own output

According to the Pecking order theory of finance, preferences are given to the
sources of finance in some order. The entrepreneurs should first prefer
internal funding option over external funding. In external funding also, the
preference should be given to debt financing over equity financing. This is
because as we move from internal funding to debt funding to equity funding,
the risk of financing increases and so as the cost of financing.

7.3 STAGE OF BUSINESS DEVELOPMENT AND

SOURCE OF FUNDING
The funding needs do not remain constant over a life of the business. At
different stages of business development, the requirement of funding
changes. Hence, the entrepreneurs should be aware about the source of
funding as per the stage of business development.

The first stage of any business is Pre-seed funding stage. Here, the
entrepreneurs just have an idea. Here, the funding is needed to test the
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feasibility of the idea and conducting the market research. Here, there are no Financing an
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customers or market. During the seed stage, the businesses can rely upon use
of bootstrapping techniques. This concept is explained in detail in the next
section. Once the idea seems feasible through market research, business
moves to the next stage i.e. start-up stage. Here, the prototype of the product
or the service is ready. According to the findings of the market research and
pilot testing, changes are made in the product or the service concept. Seed
and start-up stage; both are preliminary stage of venture development.
Hence, the businesses in these stages, rely upon their own money (personal
savings) or borrow from their family or friends. One can also think of
availing government grants at this stage. These days, the entrepreneurs can
approach angel investors or crowd funding platforms to fund the business
needs at this stage.

In the next phase, now the customer base is ready. The entrepreneur wants to
expand his business with new product or service, expand customer base and
management team. This is an early expansion stage. Here, the venture
capital investors help the entrepreneurs in raising the funds and expanding the
business through a series of funding. Once the start-up is matured and at the
advance stage, it can also think of raising the debt capital from the banks and
financial institutions as discussed earlier.
In the last stage, when the start-up wants to grow further and diversify, the
option of offering the shares to public i.e. IPO, private equity, private
placement etc. can be considered. This is the last stage of the start-up funding
stages.

Activity 1
Conduct an Interview with three entrepreneurs, Identify the stage of venture
development and also list down various sources of funding used by them at
these stages.
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7.4 BOOTSTRAPPING TECHNIQUES

Bootstrapping techniques work on the principle of “A penny saved is penny
earned”. These techniques are a collection of methods to minimize the need
to seek outside financing by a start-up. Every successful company would
have applied bootstrapping at the initial stage of their venture development.
At this stage, where the investors are not willing to risk their money, it is a
good option to bootstrap the ventures and bring them on self-sustaining
mode. These techniques also bring a discipline on the pattern of cash outflow.
Some of the examples of such techniques are illustrated below.

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Establishing a New • Buying used equipment instead of investing in new ones.
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• Renting the physical space instead of buying the land and building.
• Working from home to save upon the infrastructure cost.
• Availing discount from the suppliers.
• Use of credit cards to pay for expenses and earning credit time for
delaying the payments.
• Partnering instead of employing to save upon salary.
• Easy loan from family and friends to save upon the interest cost.
• Sharing of equipment-employees and office space for cost saving.
• Employing the relatives and friends at below market salaries.
• Obtain advance payment from customers.

Advantages
• Since the entrepreneurs do not raise equity or debt funding while
bootstrapping their ventures, it gives a complete freedom and flexibility
to them to implement their strategies. There is no interference of
investors in the operations of the business.
• They can retain the complete ownership of the business as there is no
involvement of external investors.
• Building a business from a scratch without the support of the investors,
gives a sense of achievement and accomplishment to the entrepreneurs.

Limitations
• Too much of bootstrapping can prove to be risky. There can be liquidity
crunch. Sometimes, it limits the ability of the start-up to scale up and
reaches its full potential without the support of investors.
• While bootstrapping, the entrepreneurs might be multi-tasking which at
times may be stressful and time consuming.
• The entrepreneurs might have to work meticulously to keep the records
of cash flows and needs more organized and systematic.
• The risk of failure can be higher for bootstrapped business as the
entrepreneur bears the entire risk without sharing it with other investors.

Activity 2
Interact with entrepreneurs who have established successful businesses and
ask them which bootstrapping techniques they have applied at the initial
stages of venture development.
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 Financing an
7.5 ANGEL INVESTORS Enterprise

Angel investors, also known as seed investors, are high net worth individuals
who invest directly into promising entrepreneurial businesses in return for
equity shares in the companies at initial stage of venture development. Angel
investment is also known as informal risk capital as their investment
approach is not very professional or formal such as venture capital investors.
This term actually originated with funding of Broadway plays in the early
1920s and 30s for getting productions “off the ground”.
Following are the features of angel investment:
• Unlike traditional investors, angel investors invest in unconventional and
highly risky investments.
• Angel investors bridge the gap between (a) early founders, friends and
family financing and (b) later institutional financing.
• Many angel investors are entrepreneurs themselves, as well as corporate
leaders and business professionals. They have a very good knowledge of
technology and business acumen.
• Angel investor not only provide capital but also support the investee in
non-financial way. They mentor and coach their portfolio companies,
often leading to healthy and stable growth. They also introduce
entrepreneurs to potential customers, suppliers and investors. They
provide solution to potential problem areas and help the start-up firms
gain credibility in the market.
• They mostly invest locally. This is because they believe in hands on
approach. They regularly visit the investees and are involved in the
strategic decisions of the companies. This can be done better when they
invest locally.
• As noted earlier, they are informal investors and their decision to invest
in the start-up is mostly driven by referrals. When a start-up is referred
by the past investees, friends or consultants; it becomes easier for them
to rely and invest in such referred enterprises.
Reasons for Angel Investment
Besides the financial motive i.e., return on investment (ROI), there are
multiple reasons for investment by angel investors. They are explained as
below:
• As many of the angel investors are entrepreneurs themselves, they know
the common problems faced by many of the budding entrepreneurs.
Hence, they want to come forward and help them.
• Sometimes angel investors want to support the entrepreneurs from their
home ground/native place.
• Angel investors have entrepreneurial spirit and are always moved by
their hunch for innovation and creativity. By investing in new business
ideas, they would always stay connected with new inventions and stay
involved.
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Establishing a New • Angel investors are successful entrepreneurs and business leaders.
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Society has given enough name, fame and wealth to them. They feel that
now it is time to give back to the society by investing in the start-ups.
• Beyond all these reasons, by investing in emerging business ideas, they
want to contribute their personal skills and contacts to the entrepreneurs.

Angel Investment Networks in India

Earlier, it was very difficult for the entrepreneurs to find relevant angel
investors in India. However, since last decade, the angel investors are
organised into groups and they mostly invest through networks. There are
reasons for angel investors to form groups such as together they can get
access to more investment opportunities and make more meaningful
investments, limiting the risk in investing through higher diversification, and
conducting better due diligence.

Angel Networks is a formal association of angel investors and provide a

platform to the entrepreneurs to raise seed funding. These networks basically
connect the entrepreneurs with the interested investors. There are many such
networks active in India such as Indian Angel Network, Chennai Network,
Rajasthan Network, Hyderabad Network, Chandigarh Network, Bengaluru
Network, Mumbai Angel Network and many more etc. All these networks
have different objectives and governing structures regarding sourcing of
investment deals, evaluating them, involvement with investee and finally
exiting from portfolio companies.

Angel Investment Scenario in India

According to the India Venture Capital Report 2021, India is one of the
leading start-up hubs globally. Indeed, this development is reflected in
growth of angel investments in Indian start-ups. The report shows that
investments by angel investors increased 24 %, to 341 deals in 2020 from
275 in 2019.This trend is visible in the following figure 7.2:

Figure 7.2: Angel Investment Deals

Source: Adopted from Statista (2021), https://www.statista.com/statistics/1233096/india-
number-of-angel-investment-deals/

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Activity 3 Financing an
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Visit the website of any angel investment network operating in India and
write a note on the process followed by them in helping the investors and
entrepreneurs for fund raising. Also, make a list of ten popular angel
investors in India.
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7.6 VENTURE CAPITAL INVESTORS

Venture capital investors are also equity investors such as angel investors.
They invest in high risk, high reward business ideas. While the traditional
investors prefer to invest in businesses with proven technologies, Venture
Capitalists (VCs) are eager to fund the projects where the entrepreneurs are
pursuing new and unexplored areas. Venture capital funding is raised to scale
the existing operations or to develop a new product or service.

Venture capital is a formal risk capital as the approach of VCs is more

professional and formal as compared to angel investors. VCs invest at early
expansion and expansion stage for equity in the venture. As they share
ownership with the promoters, they are active investors and provide hands on
approach to the management.
The concept of venture capital originated in 1946 when General Doritos set
up the American Research and Development Fund at Massachusetts Institute
of Technology (MIT). General Doritos is known as father of the concept of
venture capital. In India, government issued a set of guidelines for venture
capital industry in 1988 and the culture of venture capitalism began during
the period of liberalisation in India. Venture capital industry in India is
regulated by SEBI. Indian Venture Capital Association (IVCA) is the apex
body, set up by leading industry professional in India. The primary purpose
of IVCA is to promote the Private Equity and Venture Capital (PE/VC)
industry in India.

Structure of Venture Capital Fund

VCs invest in the ventures through a fund. This fund is usually in the form of
partnership. VCs serve as General Partners. The investors who provide
money to set up the fund are known as limited partners. Insurance companies,
university endowment and pension funds can serve as limited partners.
Limited partners only provide funds so they are known as passive investors.
While general partners are active investors as they assist and advise the
portfolio companies. Thus, general partners invest the money contributed by
limited partners in the promising entrepreneurial opportunities. The general
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Establishing a New partners usually get 20% of the capital gain earned from making the venture
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capital investment while the remaining 80% will be shared among the limited
partners according to their investment contribution in the fund. General
partners also get annual management fees of up to 2% of the capital invested.
Thus, general partners are accountable for the performance of the portfolio
companies and tend to be stricter in the due diligence.

Figure 7.3: Structure of Venture Capital Fund

Source: Author’s own output

Features of Venture Capital Investment

From the above discussion, the following characteristics of venture capital
investment can be identified:
• VCs tend to invest in high risk, unconventional ventures. These kinds of
ventures find it difficult to access traditional finance for the lack of
collateral and uncertainty about earnings/cash flow. Such ventures also
cannot raise money from the capital market at the initial stage.
• VCs invest funds in the companies for long term horizon. They stay
invested in the company for a period of two to ten years.
• There is a defined exit for venture capital investment which is planned at
the time of structuring the deal. When they sell their equity stake to other
investors, corporate or public, they can exit from their portfolio
company.
• VCs not only provide funds but take an active part in the management of
the firms. They work along with the founders and assist them in running
and growing the business.
• As VCs actively involve and assist the investee companies, the valuation
of such companies grows in future. Hence, when they sell their equity
stake, they realize very high returns in the form of capital gains.

Venture Capital Investment Process

VC investment process is a five-step investment process defined by Tyebjee
& Bruno (1984). These steps are explained as below.

1. Deal Origination
The VC investment process begins with this first step. Here, the sources
are identified through which VCs generate the deals for investment. The
most preferred source of deal for VCs is referral system. Here, the
investment deals may be referred to the VCs by past investee companies,
140 friends, industry association, trade partners or their parent organization.
 VCs also actively search for promising investment opportunities through Financing an
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participation in trade fair, business plan competitions, seminars, trade
fairs, conferences, exposure visits etc. And finally, the intermediaries can
also play an active role here. The entrepreneurs may approach
intermediaries and such intermediaries can connect the VCs with the
entrepreneurs.
2. Screening
On the basis of some broad criteria such as industry, size of investment,
stage of financing, market scope, geographic location etc; the VCs
conduct the preliminary screening of the proposals before the in-depth
analysis. VCs receive so many business proposals for investment. It is
not feasible to conduct detailed analysis for all of them. Hence, primary
screening of the submitted proposals will help them to save their time
and resources. The entrepreneurs may be called or on the basis of brief
profile submitted by them, screening can be carried out.
3. Evaluation (Due Diligence)
Once the business proposal looks promising prima facie in the screening
stage, it goes for detailed evaluation i.e. Due Diligence. The viability of
the business idea is examined thoroughly here. Technical feasibility,
marketing feasibility, financial feasibility, human resource feasibility,
legal feasibility etc. are considered here. Besides the feasibility aspect,
VCs also give importance to the management team of the venture. They
assess whether the entrepreneur has the right skills, education,
experience and vision (long term plan) required for the scalability of the
venture.
This stage may require significant time and resources. VCs will engage a
multi-disciplinary team of experts belonging to different areas such as
legal, infrastructure, management, information technology etc. for
conducting the due diligence.
As VCs are accountable and answerable to limited partners for the
returns on the invested capital, they give higher weightage to the step of
conducting the due diligence.
4. Deal Structuring
Once the due diligence is completed and the proposal qualifies for
investment, the deal is negotiated between the VCs and the
entrepreneurs. At this stage, the terms and conditions of the investment
such as size of the investment, type of security, ownership proportion,
duration of investment, type of exit, covenants i.e., restrictive conditions
by the VCs such as change in the management etc, are decided. These
terms should be mutually beneficial to VCs and the entrepreneurs; as
well as flexible to accommodate any changes in future.
5. Post-Investment Activity
Once the deal is negotiated and the investment is made by the VCs, the
investors become a part of ownership and actively involve themselves in
the management of the investee company. They may not interfere in the
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Establishing a New day-to-day operations. However, they would definitely advise on the
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strategic matters and decision making. VCs can influence the decision of
the management though their representation in the board of the company.

6. Exits Plans
This is the final stage in the investment process. VCs stay involved in the
company for long term and work along with the management for its
growth. Their exit is planned at the early stage of deal negotiation itself.
Once that time period is reached, VCs may sell their stake for exiting,
from the venture. There are few alternatives for the exit. VCs may sell
their stake back to the promoters (management buyout), to other
investors, to competitors or to the public i.e. through IPO. IPO is the
most preferred way for exit of the VCs.

Venture Capital Investment: Indian Scenario

As the start-up trend is rising in India, the support ecosystem is also
developing. As it can be seen from figure 7.4, there is a substantial growth of
venture capital investment in terms of value as well as number of deals. In the
year 2021, the number of deals almost doubled from 1,106 in 2020 to 2,067
in 2021 reflecting a growth of 87%. Contribution of deal value is observed to
be around 12% during this growth period. Hence, it can be interpreted that as
compared to deal size, the number of deals has increased considerably.

Figure 7.4: Venture Capital Investment in India

Source: Adopted from India Venture Capital Report (2021), https://ivca.in/wp-
content/uploads/2021/03/bain_report_india_venture_capital_2021.pdf)

Difference between Angel Investors and Venture Capital investors

Though angel investors and venture capital investors both are equity
investors and play an active role in the management of the company, there
are certain differences in their investment approach. They are explained as
below:

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Meaning: Angel investors are high net worth individuals who invest their Financing an
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own money in the seed or early stage ventures. While VCs are professionally
managed firms and invest limited partners’ money in the early expansion or
expansion stage ventures.

Investment Size: Since angel investors invest their own money at seed stage,
the amount invested by them is less while the VCs pool funds from large
investors and invest at expansion stage so the funds invested by them is
higher.

Due Diligence: Angel investors evaluate the investment opportunity as per

their own expertise and experience while the VCs have a multi-disciplinary
team to conduct the detailed evaluation. In addition to this, angel investors
invest their own money while VCs invest others money as noted before.
Hence, the angel investors are informal while assessing the investment deal
and the VCs are more formal and have strict approach for conducting the due
diligence.
Post Investment Involvement: Both are active investors but since angel
investors invest at early stage, their involvement with the investee companies
will be more as compared to VCs. At the early stage, entrepreneurs need
more hand holding. At later stage, the entrepreneurs would already have
learnt the skills, established the contacts and developed the network to
succeed.

Motivation for Investment: Angel investors provide informal risk capital

and their motives for investment are not purely financial. They want to
contribute their personal skills/contacts and give back to the society by
supporting the budding entrepreneurs. Besides, by investing in seed stage
ventures, they always stay involved with the emerging technologies and
innovation. While VCs supply formal risk capital and their motivation for
investment is mainly driven by returns on investment.

Activity 4
Select any venture capital funded company and evaluate that investment deal
in detail including the year of investment, deal size, stage of funding, role of
venture capital fund, exit mechanism etc.
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7.7 TERM LOAN

Till now, various sources of finance falling under the category of equity
capital have been explained. Debt capital can also be availed by the
enterprises through raising term loan or issue of debentures. Primarily, term
loans from any bank or financial institution; are the long-term sources of debt
availed by the enterprises.
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Establishing a New As the name suggests, term loan is a loan for a particular term. This term can
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be short term or long term. Short term is up to one year and loan of any
duration beyond one year is considered to be long term. Short term bank
loans are availed to meet the working capital requirement of any firm.
Normally, term loan refers to long term loans which can range up to 5 years,
10 years, 15 years etc. based upon the nature of the project.
Following are the features of term loan.

• Purpose: The purpose of raising the term loan can be expansion,

diversification, modernization (replacing the old machine), renovation
etc.
• Currency: Term loan can be availed in Indian Rupees as well as foreign
currency. Foreign currency term loan can be availed for import of
machinery, technical know-how etc.
• Security: Term loans are always secured. The assets which are financed
through term loan become the primary security against the loan. Other
assets and guarantee can serve as the collateral security.
• Repayment: Term loans are to be repaid along with interest. Bank or
financial institution will conduct the credit assessment before granting
the term loan and the interest rate will be charged according to the credit
risk. As the loan is repaid every year, the interest burden will decrease
and the principal repayment component remains constant. Term loans are
usually repaid in quarterly or semi-annual installments.
• Moratorium Period: Some banks or financial institutions grant
moratorium period to the enterprises. This works like a grace period and
during this period, the borrowers are not required to repay any amount
under Equated Monthly Installments (EMIs). This can be for a period of
1 to 2 years depending upon the policy of the banks. It gives a cushion to
the entrepreneurs as during the initial years of starting the business, they
may not have sufficient cash flows to repay the EMIs.
• Restrictive covenants: Some banks or financial institutions put
restrictive covenants on the borrowers to protect themselves from any
default or credit risk. These covenants are restrictive conditions on the
borrowers. According to them, borrowing firms cannot take few decision
independently. These covenants can be related to assets, liabilities, cash
flows or management. They have to take the approval of the existing
lenders for making any fresh investment, borrowing any additional loan,
buying or selling of major assets, repaying the existing loan, dividend
payment, organizational changes etc.

7.8 DEBENTURES
Like term loan, debentures are also debt instruments for raising medium to
long term capital. Those who invest in issue of debentures are known as
debenture holders and they are the creditors of the firm. Guidelines for
issuing the debentures are mentioned in Companies Act, 2013.

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Following are the features of debentures: Financing an
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• Trustees: Normally, there are three parties to the debenture issue; Issuer,
Trustees and Debenture Holders. To protect the interest of the debenture
holders, trustees are appointed through Trust Deed. Trustees supervise
the obligation of the borrowing firm.

• Security: Debentures can be secured or unsecured. Secured debentures

are known as Bonds. If the company issues, secured debentures, a charge
on fixed assets of the company is created and the company issuing such
debentures will have to follow the guidelines mentioned in Section 71(3),
Companies Act, 2013. If the debentures are unsecured and the company
defaults in payment of interest or principal, the debenture holders’
condition will be similar to unsecured creditors.
• Convertibility: Debentures can be convertible or non-convertible.
Convertible debentures can be converted in to specific number of equity
shares in future as mentioned in the trust deed.

• Interest: Debenture holders get interest regularly either quarterly, semi-

annually or annually on debentures. This interest is known as coupon
rate. It can be fixed, floating according to the market rate or zero-coupon.
Zero-Coupon debentures do not carry any coupon and are traded at
discount to the face value.
• Issue Price: Companies can issue debentures for cash. Further, they can
be issued at par (value equal to the face value), at discount (value less
than the face value) or at premium (value more than the face value).
• Redemption: Debentures can be Redeemable or Irredeemable.
Redeemable debentures are redeemed on the maturity (not exceeding 10
years from the issue date) while in case of non-redeemable debentures,
interest is paid to the debenture holders till the company wants to redeem
or cancel the debentures.

• Voting Rights: Since, debentures are a part of debt capital and not
equity capital, debenture holders do not have any voting rights.

• Debenture Redemption Reserve (DPR): On maturity, debentures are

redeemed. To ensure the safety of the debenture holders, companies
issuing debentures are required to create Debenture Redemption Reserve
out of the profits, as per Section 71(4) of the Companies Act, 2013. This
fund can be utilized only for redemption of debenture obligation.

7.9 SUMMARY
This unit discusses various sources of financing used by the entrepreneurs at
different stages of venture development. There are many challenges that an
entrepreneur has to face while starting the business. Arranging fund for the
business is one of the critical ones. At initial stage, when the entrepreneur is
exploring something new, the investor shy away from such projects. As the
risk of losing money is very high at this stage, the traditional funding options
are not suitable. Despite many challenges, there are enormous opportunities 145
Establishing a New for entrepreneurs in India. To match the requirement of funding at this stage,
Enterprise
the ecosystem of entrepreneurship provides the option of risk capital which
mainly includes angel investment and venture capital investment. Both are in
the form of equity investment and these investors play an active role in the
management of the start-ups. As the risk is very high at this stage, these
investors expect higher returns as well. Although, angel investors are
informal investors and do not invest in the venture just for the monetary gain.
Once the venture reaches to a stage where no further handholding by the
investors is required and there is no uncertainty about the cash flow, the
entrepreneurs can explore the option of raising debt capital in the form of
term loan from the banks/financial institutions or through issue of debentures.
These debt funds help in expansion of existing line of business, diversifying
in to new businesses or buyout of small companies.

Overall, with many sustained government initiatives such as Make in India.

Skill India, Digital India; the number of start-ups have started scaling up.
According to the Ministry of Commerce and Industry the recognised start-ups
in India have increased from 726 in 2016-17 to 65,861 in 2021-22.These
entrepreneurs are creating jobs in the economy at the unprecedented rate.
India has become third largest start-up ecosystem in the world after US and
China. And to cater to the funding requirement of the start-ups, there is a
positive trend in angel and venture capital investing in India as noted in the
respective sections. Thus, with favourable ecosystem in place, the
entrepreneurial trend will keep rising and making India one of the prominent
place for investors to park their funds.

7.10 KEY WORDS

Angel Investors: Angel investors are high net worth individuals who invest
in the seed stage ventures in return for equity. They are entrepreneurs and
corporate leaders. Their motive for investment is not driven by return on
investment only. They not only provide capital but also assist the
entrepreneurs in running the business in all possible ways and that is why
they are known as active investors

Bootstrapping Techniques: Bootstrapping techniques are such techniques

through which the need to seek outside (external) funding is minimised. For
example, renting and leasing instead of buying.

Earning Per Share (EPS): EPS is calculated by dividing the profit after tax
by the number of equity shares. This is an indicator of the profitability of the
companies. Higher the EPS, higher is the profitability of the company and
vice-versa.

Term Loan: These are primarily long-term loans raised from bank or
financial institutions. It is a part of debt capital. The company who raises
term loan is required to repay interest as well as the principal amount over the
term of the loan.
Venture Capital: Venture capital is a formal risk capital. Venture capitalists
are general partners. They set up a venture capital fund with the help of
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limited partners’ money and invest in ventures at early expansion and Financing an
Enterprise
expansion stage. They are equity investors and provide assistance to the
venture in their growth and development.

7.11 SELF ASSESSMENT QUESTIONS

1. Identify the problems faced by the entrepreneurs at the initial stage of
venture development. Also explain the reasons why the investors are not
ready to invest in ventures at very initial stage.
2. Explain the possible sources of finance and relate them with the stage of
venture development.
3. Evaluate the equity vs debt financing options.
4. Discuss the concept of bootstrapping techniques with examples.
5. Explain the meaning of angel investment and discuss the investment
approach of angel investors.
6. Define venture capital and explain the structure of venture capital funds.
7. Discuss various stages of venture capital investment process in India.
8. Differentiate between angel investment and venture capital investment.
9. Discuss salient features of term loan financing.
10. Explain the use of Debentures by companies for raising debt capital
along with its features.

7.12 REFERENCES/FURTHER READINGS

Charantimath, P. (2018). Entrepreneurship Development and Small Business
Enterprises. Noida: Pearson Education
Groww. (n.d.). Trading on equity - definition, types and effects of trading on
equity. Groww. Retrieved February 21, 2023, from https://groww.in/p/
trading-on-equity
Hisrich, R. D., & Peters, M. P. (2008). Entrepreneurship. McGraw-Hill
higher education
India Venture Capital Report (2021). Retrieved May 15, 2021 from
https://ivca.in/wp-content/uploads/2021/03/bain_report_india_venture_
capital_2021.pdf
The Institute of Company Secretaries of India. (2021, June). ALL ABOUT
DEBENTURES UNDER THE COMPANIES ACT, 2013. The Institute of
Company Secretaries of India. Retrieved February 21, 2023, from
https://www.icsi.edu/media/webmodules/3_JUNE_COMPANY_LAW_COR
NER.pdf
Kaur, J. (2022). Number of Recognised Start-ups Now Increased To 65,861:
Govt. Retrieved May 10,200 from https://inc42.com/buzz/number-of-
recognised-startups-now-increased-to-65861-
govt/#:~:text=The%20Indian%20Parliament%20has%20recently,as%20on%
20March%2014th%202021.

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Establishing a New Khanka, S. S. (2006). Entrepreneurial Development. New Delhi: Sultan
Enterprise
Chand and Sons
Leach, J. C., & Melicher, R. W. (2006). Finance for Entrepreneurs. New
Delhi: Cengage Learning.
NSE India. (n.d.). Eligibility Criteria for Equity. NSE India. Retrieved
February 21, 2023, from https://www.nseindia.com/companies-
listing/raising-capital-public-issues-eligibility-equity-debt
Soni, B., & Priyan, P. K. (2011). Development of Venture Capital in Gujarat:
Problems & Prospects. e-Srujan. 1(2). 93-106.
Soni, B. (2011). A Conceptual Study on Angel Investors in India. Journal of
Humanities, Social Science and Management. 2 (1). 57-64.
Soni, B., & Priyan, P. K. (2013). Funding Preferences of Young
Entrepreneurs of Gujarat: An Empirical Study. Journal of Entrepreneurship
and Management. 2(1). 1-12.
Statista, (2021). Number of angel investment deals in India from 2016 to
2020.Retrieved May 10,200 from https://www.statista.com/statistics/
1233096/india-number-of-angel-investment-deals/
Tyebjee, T., & Bruno, A. (1984). A Model of Venture Capitalist Investment
Activity. ManagementScience.30(9). 1051-1066.

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