Entrepreneurial Business Selection

and
Entrepreneurial Finance
Entrepreneurship and Project Management
Entrepreneurial Finance
 Entrepreneurial Finance
• Entrepreneurial finance is defined as the study
of resource allocation and value, which is
applied to new companies or startups and
ventures.

• Importance of Entrepreneurial Finance

• Identifying different strategies for different
phases of business venture
• Maintain regular capital inflows
• Planning Capital acquisition
 Cost of fixed assets

Cost of current assets

Factors Cost of promotion

determining
the capital Cost of establishing the business
requirements
Cost of financing

Cost of intangible assets

 • On the basis of Permanence
• Fixed Capital
• Is also known as Block Capital.
• “Is the fund required for the acquisition of those
Classificatio assets that are to be used over a long period such
as Land, Building, Machinery, Equipment and
n of Capital Tools”.
• Working Capital
• Is also known as Circulating Capital.
• Is the money invested in Current assets like Raw
Materials, Finished goods, Debtors etc.”
 Classification of Capital

• On the basis of Period of Use

• Long Term Capital
• Is such money whose repayment is arranged for more than 5
years in future
• Sources – Owner’s Equity, Term Loans from Financial Institutions,
Credit Facilities from Banks etc.
• Short Term Capital
• Is borrowed capital that is to be repaid within one year.
• Sources - Bank Borrowings, Deposits or Borrowings
Classification Fixed Working
of Capital Capital Capital
 Accoding to Shubin

Fixed Capital  “ the funds required for the acquisition of

or those assets that are to be used over for a
Block Capital
long period such assets as land, buildings
machinery equipment and tools"
 Factors Determining Fixed Capital Requirement
• Activities undertaken by the Enterprise
• Nature or Character of Business
• Manufacturing
• Manufacturing
• Marketing
• Trading and Finance
• Financial
• Size of Business
• Cost of Non-Current and Intangible Assets
• Small Business
• Preliminary Expenses
• Large Business
• Cost of Establishment
• Type of Business • Patents
• Capital Intensive • Goodwill

• Labor Intensive • Copyrights

• Production Techniques • Mode of Acquisition of Fixed Assets

• Automated • Outright Purchase
Working Capital
 Revolving or Circulating or Short-term
Capital
According to Shubin
 “ Working capital is the amount of funds
necessary to cover the cost of operating
the enterprise”
Working Capital Classification
On the Basis On the Basis
of Concept of Time
Permanent
Gross Working
--Regular
Capital
--Reserve

Temporary
Net Working
--Seasonal
Capital
--Special
 Gross Working Capital
 In the broad sense the term “working capital” refers to the
gross working capital and represents the amount of funds
invested in current assets.
On the basis Net Working Capital
of Concept  In a Narrow Sense, the term Working Capital refers to the
Net Working Capital.
 Net Working Capital is the excess of Current Assets over
Current Liabilities
 NWC = Current Assets-Current Liabilities
=CA-CL
 Factors Determining Working Capital Requirement
• Nature or Character of Business

• Size of Business/ Scale of Operations Cash

• Production Policy(Automated or Simple)

Raw
Debtors
Materials
• Manufacturing Process/ Length of Production Cycle

• Seasonal Variations

• Working Capital Cycle

Sales WIP
• Credit Policy
Finished
• Business Cycle Goods

• Rate of Growth of Business

• Other Factors
 Entrepreneurial Sources of Finance
• Seed Funding

• Also referred to as seed money or seed capital

• Is a very early investment which aims at helping a business grow and generating its own capital where investors often get

equity stake in exchange for the capital invested.

• Business Angels

• Was introduced by Frederick Terman, who is known as the father of Silicon Valley, along with William Shockley.

• A private investor who invests part of his finance and time in the early stages of the company.

• Venture capital

• Is a financing method in which financial investors participate in a new company’s capital against cash and guidance.

• The primary objective is to make a profit by selling its stake in the company in the middle term.

• Expect very high profitability as they take a very high risk of investing in a relatively new venture.

• While business angels invest their own money, venture capitalists invest other people money.

• Venture capitalists enter during the growth stage while business angels invest at a very early stage.
 Entrepreneurial Sources of Finance
• Government venture capital

• They aim to help new businesses solve the financial problem and reduce the gap between the

company and finances.

• Corporate venture capital

• These are venture capital investments by established companies in startups or growth companies.

• Take a major stake in these young firms and help them develop the market.

• Usually invest either in the early venture stage or late stage of the venture.

• Family offices

• The families who own very high net worth and large companies establish their own offices.

• The primary objective of these offices is to manage their wealth.

• These family offices also invest in different growth ventures.

 Entrepreneurial Sources of Finance
• Financial bootstrapping(personal funds)
• Is used to encompass various methods for avoiding the financials of external investors.
• Founders invest in their own money, which gives them the freedom to develop their venture.
• Types of financial bootstrapping - joint utilization, sweat equity, owner financing, delaying payment, personal debt, etc.
• Bootstrapping is founding and running a company using only personal finances or operating revenue. This form of

financing allows the entrepreneur to maintain more control, but it also can increase financial strain.
• External financing
• Buyouts
• are utilized to transfer ownership by different methods. The company can be private and free of regulations, or it can be
public.
• Might also change or refocuses the organizations mission and vision
• Management buyout
• Leveraged buyout
 Entrepreneurial Sources of Finance
• Accelerators and Incubators

• Accelerators and incubators can be government or private institutions.

• The objective is to assist the ventures with advice, access for network, shared

resources, and mentorship to grow.

• They also offer physical space along with financial resources and against that,

they expect equity from the venture.

Entrepreneurial Sources of Finance
• Crowdfunding
• Crowdfunding is when a "crowd" funds a project or business, rather than one or two major
investors.
• There are four different types of crowdfunding: rewards, donation, debt and equity.
• To run a successful crowdfunding campaign, you need to capture the attention of a large number
of backers and convince them that your project is worthy of their investment.
• Examples of Crowdfunding sites:
• Kickstarter
• GoFundMe
• LendingClub
• Indiegogo
 Entrepreneurial Sources of Finance
• Donation: Donation-based crowdfunding is when people give a campaign, company or person money for nothing in
return. Let's say you create a crowdfunding campaign to purchase new equipment for your company. The individuals
who give you money do it out of support for the growth of your business and nothing else.

• Debt: Debt-based donations are peer-to-peer (P2P) lending, which is a form of crowdfunding. In debt-based donations,
the money pledged by backers is a loan and must be repaid with interest by a certain deadline.

• Rewards: This is when donors receive something in return for their donations. The rewards vary by the size of the
donation, which incentivizes higher contributions. Based on how much money participants give to a campaign, they
may receive a T-shirt, the product or service – often at a discounted rate.

• Equity based or Investment Based: While some crowdfunding campaigns don't allow backers to own a portion of the
company they're supporting, equity-based crowdfunding allows small businesses and startups to give away a portion of
their business in exchange for funding. These donations are a type of investment, where participants receive shares in
the business based on how much money they contribute.
 Entrepreneurial Sources of Finance
• IP based investment funds
• These investment funds invest in intellectual properties. They primarily look into patents. When they invest in

intellectual property, they can monetize it and use those funds to grow their venture.
• Therefore IP-based investment funds do not provide debt or equity.

• IP backed debt funding

• IP backed debt funding are those companies which exploit the economic value of their intellectual property.

• The primary purpose is to obtain loans from banks.

• They try to get those from financial institutions where IP rights can be used as collateral.

• These instruments usually involve a very high structuring cost and other crucial components when it comes to

funding of startups.
 Entrepreneurial Sources of Finance
• Mini-bonds
• Are the public bonds that are issued in the segment of special bonds.

• Reflects the desire of the firm to reduce their dependence on banks for financing activities.

• University-managed fund
• Are launched very recently to support the ideas of university alumni, faculty, or staff.

• These funds are essential to get the technology ready and to hand it over to the private sector or a

development partner.

. Venture debt lenders

• Venture debt funds or lenders or financial institutions that specialize in providing loans to startups only.
 Public Issue

Private Equity Funds

Banks / Financial Institutions

Venture Capital

Angel Investor

Incubators

Seed Funding
 Non Institutional Sources of Finance
Medium
Short Term Long Term
Term
Sources Sources
Commercial / Trade Credit
Sources
Issue of Preference Shares Issue of Equity Shares
Customer Advances
Bill Discounting Issue of Debentures
Issue of Preference Shares
Bank Overdraft
Public Deposits
Cash Credit
Issue of Debentures
Factoring Bond Loans
Commercial Paper
Loans From Fianancial Loans from Fianancial
Hire Purchase and Leasing Instituitions Institutions
 Loans from Financial Institutions
• Financial Institutions
• Institutions for technical
• Industrial Development Bank of India (IDBI)

• Industrial Credit and Investment Corporations of India Ltd (ICICI) guidance

• Industrial Finance Corporation of India (IFCI) • Small Industries Development
• Industrial Investment Bank of India(IIBI)
Organisation (SIDO)
• Small Industries Development Bank of India (SIDBI)
• District Industries Centres
• National Small Industries Corporation Ltd (NSIC)

• State Small Industries Corporation (SSIC) (DICs)

• Regional Rural Banks (RRBs) • Technical Consultancy
• State Financial Corporations (SFCs)
Organisations (TCOs)
• State Industrial Development Corporations (SIDCs)

• Cooperative Banks and Gramin Banks

 Industrial Development Bank of
India(IDBI)
• 1st July,1964
• Large and Small scale Industries
• Subsidiary of the RBI
• It provides technical and administrative assistance to any firm in
order to promote, manage or expand it.
• Manufacturing, processing or preservation of goods or mining,
shipping, transport, hotel shore fishing or maintenance, repairs,
testing or servicing of machinery or vehicles etc., Besides this
IDBI also provides financial assistance or the export of
Engineering goods and services on deferred payment basis.
Industrial Credit and Investment Corporations of India Ltd
(ICICI)
• Private sector development bank and Financial Institution
Established in 1955
• ICICI grants Medium and Long term loans
• Provide assistance in the establishment, expansion and up
gradation, modernization of private sector units
• Considers only those projects whose budget/project cost is Rs.300
lakhs or above
• Companies with Limited liability. Sole proprietorship, Partnership
firm or any Cooperative Society can take help for assistance in
finance.
 Industrial Finance Corporation of India (IFCI)
• Established under IFCI Act in July,1948. Since July 1, 1993 it has been
included under the Companies Act
• Provides financial assistance to the Industrial sector in the form of rupee
and foreign currency loans, underwriting, subscription to shares and
debentures and purchase of equipment procurement, leasing, merchant
banking facilities, etc.,
• Financial assistance to companies and cooperative societies which are
incorporated in India
• Manufacturing, preservation or processing of goods, shipping, mining or
hotel industry or in the generation or distribution of power and electricity
in industrial project either in the private or joint sectors.
Industrial Investment Bank of
India(IIBI)
• IRCI(Industrial Reconstruction Corporation of India) was
established in April,1971
• Aim and Objective-Solve the problems and difficulties faced by the
sick units and give proper and quick assistance for speedy
reconstruction and development of those industries
• IRCI was Renamed as IIBI
• Provides technical and managerial assistance to the sick industrial
units
• Provide the merchant banking services while dealing with corporate
restructuring such as merges, amalgamations and so on
 Small Industries Development Bank of India (SIDBI)

• Started by Government of India under the Parliament’s act in October,1989

as wholly owned IDBI subsidiary
• Basically set up as an apex institution for providing financial and non-financial
assistance to tiny and small scale industries
• Coordinates the work of other development financial institutions
• Taking initiative in developing and updating the existing technology and
improving the sick units
• Initiating and taking up new projects
• Improving the infrastructure for SSI(Small Scale Industries)
• Agencies to organise EDP
• Micro Credit Schemes
State Small Industries Corporation (SSIDCs) and
Small Industries Service Institutions(SISIs)
• This bank was setup under the Companies Act,1956
• Its main objective is to take care of the needs of the small, tiny and
cottage industries
• Acquiring and distributing the scarce raw material
• Supplying machines on hire purchase agreement
• Assisting in Marketing of goods manufactured by small industries
• Providing Seed capital to the entrepreneurs
• Providing management assistance to manufacturing and production
units
 State Small Industries Corporation (SSIDCs) and
Small Industries Service Institutions(SISIs)

• Role of Small Industries Service Institutions(SISI)

• The SISI is one of the extensive training service provider which is
subsidiary of SIDO(small industrial development organization)
• Develop the skills of employees and managerial personnel
• Initiating the EDP programmes to transform the skilled and
prospective individuals into entrepreneurs
• Provide technical training and service to small scale
entrepreneurs in specialised fields
National Small Industries Corporation Ltd (NSIC)

• Established by GOI in 1955

• Promoting and developing SSIs in the country
• Provides equipment on hire-purchase and leasing system to SSIs
• Enable marketing of SSI’s products
• Make a provision for special concessions to the Women entrepreneurs,
weak entrepreneurs, ex-servicemen and SSI’s located in down trodden
areas
• Encourage export of SSIs products
• Improving the prototypes of machines, equipments and tools
• Providing technical training
 State Industrial Development Corporations (SIDCs)
• SIDC was set up under Companies Act,1956, in the 1960 and 1970 as a
wholly owned undertaking of state government with an objective of
promoting and developing medium and large industries, they play
predominant role in industrial development
• The SIDCs are the agents of IDBI and SIDBI
• Extending risk capital to the entrepreneurs in the form of equity
participation and seed capital assistance
• Granting loans, lease finance and guarantees to the industries
• Performing promotional activities such as generating project ideas,
preparing feasibility reports, choosing and training of entrepreneurs
• Establishing industrial estates by providing infrastructural facilities
 State Financial Corporations (SFCs)
• Initiated through SFC Act which was passed by the parliament on
September 28th, 1951
• The first SFC was set up in 1953 in Punjab
• Provide Financial assistance only to medium and small size industries
• At present there are about 18 SFCs which are operating since 40 years
• Offer long term finance to small and medium scale industries in both Public
and private sector companies
• Term loans for the purchase of land, building, plant, machinery,
prerequisites and other assets
• Inculcating and promoting self employment
• Extend seed capital assistance under the IDBI scheme
Micro, Small, and Medium Enterprises (MSME's)

• The Government of India has enacted the Micro, Small and Medium
Enterprises Development (MSMED) Act, 2006
• Enterprises engaged in the manufacture or production, processing or
preservation of goods as specified below:
• A micro enterprise is an enterprise where investment in plant and machinery
does not exceed Rs. 25 lakh;
• A small enterprise is an enterprise where the investment in plant and
machinery is more than Rs. 25 lakh but does not exceed Rs. 5 crore;
• A medium enterprise is an enterprise where the investment in plant and
machinery is more than Rs.5 crore but does not exceed Rs.10 crore.
Micro, Small, and Medium Enterprises (MSME's)

• Providing assistance to prospective and existing

• Preparing project profiles of products or industries suitable to MSME
sector
• Developing ancillary units
• Carrying out Management, Entrepreneurship and Skill development
programmes
• Control of Quality and Pollution
• Technology upgradationa and energy conservation
• Conducting Market surveys
 Debentures

• Advantages • Disadvantages
• Control of Company is not Surrendered • Cost of Raising Capital is High

• Trading on Equity • Common People cannot buy

• Interest is an allowable Expenditure Debentures

• Can be reduced if company has Surplus • Not Meant for Companies Earning

Funds greater rate of interest

 Preference Shares

• Advantages • Disadvantages
• Fixed Return • Burden of Fixed Return
• Long Term Funds • No Controlling Rights
• Restricted Voting Rights • Cost of Raising Capital is Higher
• Repayment of Capital • Does not attract many Investors
• No Securities Required

• Trading on Equity
 Equity Shares

• Advantages • Disadvantages
• No Fixed Dividend • No Trading on Equity

• No Charge on Assets • Danger of Over Capitalization

• Permanent Source • Obstacles for Management

• Real Owners of the Company

• More Dividend