CHAPTER 8 Flashcards
(11 cards)
source of short term finance
Finance that is normally repayable or reviewed within 12 months
• Examples include:
– Trade credit: Credit extended by one business to another in the normal course
of business
– Bank credit: Overdraft facility is associated with a cheque or current account
facility
– Short-term funds from other sources: There are numerous other lesser-
known sources that may be used, but these might not be readily available to the
smaller business. These include
» bills of exchange
» acceptance credits
» factoring
» customer advance payments
» shipper’s finance
source of medium, term funding
Finance that is repayable between one and three years
• Examples include:
– Instalment sale transaction (hire purchase): This is a credit sale in
which it is agreed that the purchase price of the item will be paid in
instalments.
– Leasing finance: A leasing transaction is a transaction in which goods
are leased at a stated sum of money at certain dates or a future date, in
whole or in instalments.
– Medium-term loans: These loans are normally repayable over a 24- to
60-month period and are granted to finance working capital, providing
bridging finance until long-term sources of finance can be obtained, or for
the acquisition of fixed assets
source of long term funding
• Long-term funding means that capital is provided for anything up to the
entire lifespan of your business.
• Examples include:
– Equity capital: The initial capital that you contribute to the business to
get it started
» Sole proprietorship – cannot attract equity capital as a source of long-term
finance; funds limited to proprietor’s personal assets and creditworthiness
» Partnerships – capital accounts
» Close corporations – members’ contribution
» Companies – share capital
– Ordinary shares
– Preference share
CHAPTER 8:
FINANCING AN
ENTREPRENEURIAL
BUSINESS
LEARNING OUTCOMES
• LO 1: Determine the capital requirements of a new business.
• LO 2: Explain the different short-term sources of finance.
• LO 3: Explain the different medium-term sources of finance.
• LO 4: Explain the different long-term sources of finance.
• LO 5: Understand where to obtain finance for the business.
• LO 6: Explain how the venture capital market works.
• LO 7: Explain how crowdfunding can be used to finance a business.
• LO 8: Understand how to attract investors.
8.1 INTRODUCTION
• Finding finance, or gaining financial support for any new business, is one of the
difficulties experienced by entrepreneurs.
• It is important to know what sources of finance are available and what is
required from the various financial institutions such as banks, development
agencies and investors.
• Read: WeBuyCars
8.2 DETERMINING THE FINANCIAL
REQUIREMENTS OF THE BUSINESS
Determining the business’s financial requirements will require
forecasting of the future. The basic steps involved in predicting these
financing needs are the following:
1. Project the business’s sales, revenues and expenses over the planning period.
2. Estimate the levels of investment in current and fixed assets that are
necessary to support the projected sales.
3. Determine the business’s financing needs throughout the planning period.
8.2 DETERMINING THE FINANCIAL REQUIREMENTS OF THE BUSINESS (continued)
Figure 8.1 The financial
planning process
8.3 SOURCES OF SHORT-TERM FINANCE
• Finance that is normally repayable or reviewed within 12 months
• Examples include:
– Trade credit: Credit extended by one business to another in the normal course
of business
– Bank credit: Overdraft facility is associated with a cheque or current account
facility
– Short-term funds from other sources: There are numerous other lesser-
known sources that may be used, but these might not be readily available to the
smaller business. These include
» bills of exchange
» acceptance credits
» factoring
» customer advance payments
» shipper’s finance.
8.4 SOURCES OF MEDIUM-TERM FINANCE
• Finance that is repayable between one and three years
• Examples include:
– Instalment sale transaction (hire purchase): This is a credit sale in
which it is agreed that the purchase price of the item will be paid in
instalments.
– Leasing finance: A leasing transaction is a transaction in which goods
are leased at a stated sum of money at certain dates or a future date, in
whole or in instalments.
– Medium-term loans: These loans are normally repayable over a 24- to
60-month period and are granted to finance working capital, providing
bridging finance until long-term sources of finance can be obtained, or for
the acquisition of fixed assets.
8.5 SOURCES OF LONG-TERM FINANCE
• Long-term funding means that capital is provided for anything up to the
entire lifespan of your business.
• Examples include:
– Equity capital: The initial capital that you contribute to the business to
get it started
» Sole proprietorship – cannot attract equity capital as a source of long-term
finance; funds limited to proprietor’s personal assets and creditworthiness
» Partnerships – capital accounts
» Close corporations – members’ contribution
» Companies – share capital
– Ordinary shares
– Preference shares
8.5 SOURCES OF LONG-TERM FINANCE (continued)
– Debentures: Money is borrowed from outside sources by issuing
debentures. Debentures are normally printed documents that are fully
negotiable and transferable.
– Retained earnings: internal financing: For many businesses an
important source of long-term finance takes the form of profits that are
retained in the business as “reserves”, instead of being distributed as
dividends.
– Long-term loans/mortgage bonds: This form of finance can only be
considered if the business owns immovable property that is not
encumbered or only partly encumbered by a mortgage bond.
8.6 INSTITUTIONS THAT SUPPORT SMALL AND
NEW BUSINESS BUSINESSES
Numerous government, non-governmental and private enterprises are involved
in financing new and existing businesses:
• Commercial banks
• Merchant banks
• Business Partners
• Small Enterprise Finance Agency (sefa)
• Industrial Development Corporation (IDC)
• Local business support centres
8.7 INFORMAL SOURCES OF FINANCE
• 3 Fs – family, fools and friends: It is quite often the only and last resort of
start-up entrepreneurs.
• Stokvels: A stokvel is a savings system with any number of members. All the
members contribute to it on a regular basis and all benefit from it. Stokvels
have different objectives, as follows:
– Savings clubs, where members contribute a fixed amount on a monthly
basis to a communal account.
– Loan stokvels, where members save money in an account and then lend
money to members.
– Investment clubs, for members to access opportunities for growth of
their combined funds.
8.8 THE VENTURE CAPITAL AND PRIVATE EQUITY
MARKET
• Private equity
– Capital raised from various investors (development finance institutions,
pension funds, high net-worth individuals or families)
• Venture capital
– A form of private equity that is supplied to a business during its earliest
stages of development and growth
– Available from venture capital organisations and from “angel investors”
8.8 THE VENTURE CAPITAL AND PRIVATE EQUITY MARKET (continued)
Figure 8.2 S-curve
Source: Adapted from the website of Holland Private Equity B.V. (2009)
8.9 CROWDFUNDING
“Crowdfunding is the use of small amounts of capital from a large number of
individuals to finance a new business. Crowdfunding makes use of the easy
accessibility of vast networks of people through social media and crowdfunding
websites to bring investors and entrepreneurs together. Crowdfunding has the
potential to increase entrepreneurship by expanding the pool of investors from
whom funds can be raised beyond the traditional circle of owners, relatives and
venture capitalists.” (Investopedia 2022)
8.10 ATTRACTING INVESTORS AND THE PRIVATE
PLACEMENT OF SHARES
Five key stages
• Stage 1: Making contact
– The entrepreneur and the investor have to become aware of each other
and make contact. This is also referred to as deal origination.
• Stage 2: Deal screening
– Investors will do an initial evaluation of the proposal to see whether it
fits in with the profile of their activities and/or their investment profile.
8.10 ATTRACTING INVESTORS AND THE PRIVATE PLACEMENT OF SHARES (continued)
Five key stages (continued)
• Stage 3: Deal evaluation
– The key factors to be considered in this evaluation will be the potential
for the business in terms of the innovation it is offering, the conditions in
the market it aims to develop, and the competitive pressures it will face.
• Stage 4: Deal structuring
– Refers to how the initial investment will be made and how the investor
will see that investment bear fruit.
• Stage 5: Post-deal activity
– Investors usually prefer to retain a degree of involvement.
8.10 ATTRACTING INVESTORS AND THE PRIVATE PLACEMENT OF SHARES (continued)
Figure 8.3 The process of
attracting investors
Source: Adapted from Wickham
(2001: 289)
8.11 THE COST OF RAISING FINANCE
Many entrepreneurs prefer to grow slowly by using internal cash flow to fund
growth. Some have a fear of debt and of giving up control of the business to
investors.
Figure 8.4 The cost of raising finance
Source: Adapted from Allen (1999)
8.11 THE COST OF RAISING FINANCE (continued)
• Upfront cost: The preparation of the proposal (requires input from
chartered accountants, financial consultants, the entrepreneur and an
investment banker)
• Marketing cost: Costs involved in advertising, travelling and brochures. The
cost to the entrepreneur in terms of time away from the business while
preparing and marketing the proposal is difficult to quantify.
• Back-end cost: It will depend largely on the financial intermediary or
institution used in raising the finance. Back-end costs can include investment
banking fees, legal fees, brokerage fees and various other fees.
8.12 INITIAL PUBLIC OFFERING
• “Going public”, or the initial public offering (IPO), is quite often the ultimate
way of raising growth capital.
• There is no rule of thumb as to when a business must go public. It will need
to meet the JSE’s requirements for listing, in particular the requirement of
profit history for a specified number of years.
8.13 THE NATIONAL CREDIT ACT 34 OF 2005
• The NCA facilitate new and protective rights for consumers for all types of
credit agreements.
• It serves as a measure that allows consumers to make more-informed
decisions before buying goods and services on credit.
INSTITUTIONS THAT SUPPORT SMALL AND
NEW BUSINESS BUSINESSES
Commercial banks
• Merchant banks
• Business Partners
• Small Enterprise Finance Agency (sefa)
• Industrial Development Corporation (IDC)
• Local business support centres
informal sources of funding
3 Fs – family, fools and friends: It is quite often the only and last resort of
start-up entrepreneurs.
• Stokvels: A stokvel is a savings system with any number of members. All the
members contribute to it on a regular basis and all benefit from it. Stokvels
have different objectives, as follows:
– Savings clubs, where members contribute a fixed amount on a monthly
basis to a communal account.
– Loan stokvels, where members save money in an account and then lend
money to members.
– Investment clubs, for members to access opportunities for growth of
their combined funds
what is venture capital and
Private equity
Private equity
– Capital raised from various investors (development finance institutions,
pension funds, high net-worth individuals or families)
• Venture capital
– A form of private equity that is supplied to a business during its earliest
stages of development and growth
– Available from venture capital organisations and from “angel investors”
what is crowdfunding
Crowdfunding is the use of small amounts of capital from a large number of
individuals to finance a new business. Crowdfunding makes use of the easy
accessibility of vast networks of people through social media and crowdfunding
websites to bring investors and entrepreneurs together. Crowdfunding has the
potential to increase entrepreneurship by expanding the pool of investors from
whom funds can be raised beyond the traditional circle of owners, relatives and
venture capitalists.”
5 key steps to attracting investors and private placement of shares
Five key stages
• Stage 1: Making contact
– The entrepreneur and the investor have to become aware of each other
and make contact. This is also referred to as deal origination.
• Stage 2: Deal screening
– Investors will do an initial evaluation of the proposal to see whether it
fits in with the profile of their activities and/or their investment profile
• Stage 3: Deal evaluation
– The key factors to be considered in this evaluation will be the potential
for the business in terms of the innovation it is offering, the conditions in
the market it aims to develop, and the competitive pressures it will face.
• Stage 4: Deal structuring
– Refers to how the initial investment will be made and how the investor
will see that investment bear fruit.
• Stage 5: Post-deal activity
– Investors usually prefer to retain a degree of involveme
what are the cost of raising finance
• Upfront cost: The preparation of the proposal (requires input from
chartered accountants, financial consultants, the entrepreneur and an
investment banker)
• Marketing cost: Costs involved in advertising, travelling and brochures. The
cost to the entrepreneur in terms of time away from the business while
preparing and marketing the proposal is difficult to quantify.
• Back-end cost: It will depend largely on the financial intermediary or
institution used in raising the finance. Back-end costs can include investment
banking fees, legal fees, brokerage fees and various other fee
what is initial public offering
Going public”, or the initial public offering (IPO), is quite often the ultimate
way of raising growth capital.
• There is no rule of thumb as to when a business must go public. It will need
to meet the JSE’s requirements for listing, in particular the requirement of
profit history for a specified number of year
explain the national credit act
The NCA facilitate new and protective rights for consumers for all types of
credit agreements.
• It serves as a measure that allows consumers to make more-informed
decisions before buying goods and services on credit
